Mergers and acquisitions (M&A) are a massive component in global financial activity, amounting to perhaps $5 trillion in activity in 2015 alone. With such a large dollar volume, some analysts (mostly academics) wonder why a large portion of studies on M&A activity show very little financial gain to the acquiring firm from their M&A activity.
Source: IMF
Why is there so much M&A activity happening when there is potentially little to no financial gain? Well, one answer might be that virtually all of the academic studies on the topic rely on data reported by public acquirers versus data from both public and private acquirers.
What do the results look like when a distinction is made between private acquirers and public acquirers? In an interesting new study, a couple of professors provide some answers. Here is a look at a fascinating recent study from a couple of professors out of the University of Toronto and the Shanghai Jiao Tong University (Andrey Golubov and Nan Xiong).
The Data
The authors employ data on U.S.-based firms’ M&A activity from the Capital IQ database. In a bit of uniqueness, in the U.S., private firms that have $10 million or more in total assets and 500 or more shareholders must file with government regulators. Private companies may also list their securities with the U.S. Securities and Exchange Commission.
The authors collected data on leveraged buyouts by public and private firms from 1997 to 2010. A summary of their results follow.
The Findings
In the following table are the results. Interestingly, there is a large difference between the financial returns of private companies compared to public companies. The Return on Assets (ROA) difference is an astonishing 5.77% compared to -0.88% from one year before acquisition to two years thereafter. Many of the results are statistically significant to at least the 95% level.
Source: Golubov and Xiong
Why Would This Outcome Show Up?
A number of possible reasons might explain the difference in returns between private acquirers and public acquirers. Perhaps the strongest reasons might be that private firms lack the problem of dispersed ownership and posses a lower challenge on the connection between ownership and management.
Conclusion
The interesting results – still to be confirmed by other studies – suggest that there is certainly something to the long-debated issue on concentrated ownership and dispersed ownership. We will be watching to see whether future research will corroborate Golubov’s and Xiong’s results. If substantiated, it suggests the private equity world perhaps has some adjustments to make.
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