Gompers Xuan (2008) - Bridge Building In Venture Capital Backed Acquisitions

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Reference

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Gompers, P.A. and Xuan, Y. (2008), "Bridge building in venture capital-backed acquisitions", HBS Working paper (pdf) 

@book{gompers2008bridge,
  title={Bridge building in venture capital-backed acquisitions},
  author={Gompers, P.A. and Xuan, Y.},
  year={2008},
  publisher={Harvard Business School},
  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

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.

Quotes

"...We would expect a much smaller asymmetric information problem for firms that shared a common investor, i.e., when the public acquirer had been financed by the same venture capitalist as the private target. Because venture capitalists are typically involved with startups from a very early stage, they have substantial information about the firm’s technology and market that may be hard for any acquirer to verify. A venture capitalist that has been involved with both an acquirer and a young, private target may be able to credibly convey that information. In this case, the asymmetric information about the valuation of the target would be smaller for the acquiring firm with a common venture capital investor. Because any “winner’s curse” problem is reduced, the market would have a more positive response to the acquisition." -page 9.

Data

1,261 acquisitions of VC backed private cos from 1992-2006. Apparently assembled from the VentureXpert Mergers and Acquisitions (VCMA) database (page 11).

Restrictions

  • 1992-2006
  • Public acquirer
  • Private VC backed target
  • 100% acquisitions
  • Multiple announcements on the same date eliminated
  • At least 30 non-missing returns -200 -> -20

Measures

Whether both the acquirer and the target were VC-backed (870/1261), and whether they had a common VC investor (181/870).

Results

Univariate CAR3s:

  • Acquirer not-VC backed: 0.65%(0.092) N=391
  • Acquirer VC-backed No Common VC: 0.25%(0.102) N=707
  • Acquirer VC-backed Common VC: 2.72%(0.113) N=163

Inferred VC effect (i.e. av. CAR3 in sample): 0.693% (Calc'd by Ed).

Within Common VC:

  • Low experience VC: 1.19%(0.009)
  • High experience VC: 4.28%(0.015)

CAR3 is 2.6% to 2.8% higher when VC backed acquirer. Odds of becoming the acquirer is 3x higher than random pairing.

Multivariate:

Year and industry fixed effects through-out. Acquirer and target share common VC with full controls: ~0.027 (2.7%)

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