Financial bidders like private equity firms often compete with corporate bidders for the same target. Over the last 27 years, financial sponsors made 23 percent of all competing bids. In our paper, It Pays to Follow the Leader: Acquiring Targets Picked by Private Equity, forthcoming in the Journal of Financial and Quantitative Analysis, we examine how the presence of financial sponsor competition affects corporate buyers. Financial bidders are considered experts in the business of identifying undervalued targets. Gains from acquiring an undervalued firm pursued by private equity may accrue to any winning bidder that pays a similar premium for the target. Moreover, existing research shows that financial bidders have lower average valuations than strategic bidders. Thus, a corporate acquirer competing with a financial bidder (which is typically private) may win the auction at a lower premium than when it competes with another public corporate firm.
We find that corporate acquirers who purchase targets that are sought after by financial buyers outperform corporate acquirers who buy targets bid on by corporate firms only or those without competition. These results are robust to alternative measures of acquirer performance and different performance windows. A battery of tests shows that deal characteristics, acquirer abilities, and observable target characteristics cannot explain this difference in returns.
