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*[[VC Acquisitions Paper]]

==Key Papers==

abstract={We study the relation between venture capital (VC) backing and the profitability of privately held firm acquisitions. Controlling for endogeneity in venture funding, we document that acquisitions of VC-backed targets lead to significantly higher acquirer announcement returns than non VC-backed acquisitions. Acquirer announcement returns are also substantially larger when the acquisitions are equity financed. We evaluate five hypotheses, four of which pertain to various VC conflicts of interest with other investors, to explain the cross section of acquirer announcement returns and target purchase price-to-book value ratios. We find evidence that higher acquirer returns and lower target purchase price-to-book value ratios are in part caused by liquidity pressures on VC funds nearing their termination dates. Acquisitions of targets backed by VCs with close financial ties to the acquirers have significantly higher acquirer announcement returns and lower target purchase price-to-book value ratios. This evidence is consistent with a VC moral hazard problem where VC incentives to obtain higher target purchase prices are compromised by their dual financial relationships. Corporate venture capitalists (CVC) have strategic as well as financial goals, which create conflicts with other venture investors. Consistent with CVC conflicts of interest, acquisitions of firms backed by CVCs exhibit higher acquirer stock returns. We also uncover evidence that the shifting strategic objectives of CVC parents and their weak commitment to the VC market lead to rapid exits from their VC portfolio firms and higher wealth gains for acquiring firms. In summary, we find support for several hypotheses concerning VC conflicts of interests with other investors for explaining higher acquirer announcement returns when targets are VC-backed.},

filename={Masulis Nahata Way (2006) - Venture Capital Conflicts Of Interest.pdf}

}

abstract={This paper studies the role of common venture capital investors in alleviating asymmetric information between public acquirers and private venture capital-backed targets. We find that acquisition announcement returns are more positive for acquisitions in which both the target and the acquirer are financed by the same venture capital firm. Similarly, having a common investor increases both the likelihood that a transaction will be all equity-financed as well as the fraction of stock in the overall acquisition payment. In addition, an acquisition is more likely to take place when there is a common venture capital investor linking the acquirer and the target. Our results suggest that common venture capital investors can form a bridge between acquiring and target firms that reduces asymmetric information associated with the transaction for both parties.},

filename={Gompers Xuan (2008) - Bridge Building In Venture Capital Backed Acquisitions.pdf}

}

abstract={A prominent motive for corporate venture capital (CVC) is the identification of entrepreneurial-firm acquisition opportunities. Consistent with this view, we find that one of every five startups purchased by 61 top corporate investors from 1987 through 2003 is a venture portfolio company of its acquirer. Surprisingly, our analysis reveals that takeovers of portfolio companies destroy significant value for shareholders of acquisitive CVC investors, even though these same investors are “good acquirers” of other entrepreneurial firms. We explore numerous explanations for these puzzling findings, which seem rooted in managerial overconfidence or agency problems at the program level.},

filename={Benson Ziedonis (2010) - Corporate Venture Capital And The Returns To Acquiring Portfolio Companies.pdf}

}

abstract={Given the level of involvement between a venture capitalist and a portfolio firm’s management, and a VC’s propensity to facilitate collaborations within its network, it is likely that a VC continues to affect a firm beyond a successful public offering. This could manifest itself in many ways, including the M&A decisions of management, with a VC facilitating and encouraging mergers and acquisitions within its network. This paper seeks to answer two questions. First, what role do venture capital firms play in the acquisition decisions of their previous IPOs? And second, what effect does this have on acquisition announcement returns? To do this, I focus on the acquisition activity of VC-backed IPOs, specifically their acquisitions of VC-backed private targets. I find that venture capitalists continue to affect firm M&A decisions well after the initial public offering, but that this is generally of benefit to acquiring firm shareholders. The information sharing that occurs between a VC and a firm’s management appears to result in value-enhancing acquisitions of VC-backed private targets. This paper documents a further mechanism through which venture capitalists can add value to corporations.},

filename={Jones (2008) - The Information Role Of Venture Capitalists.pdf}

}