Do Private-Equity Firms Create Value in Cross-Border M&A?
Finance / 27. Juli 2016
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Professor für Finance Leiter Finance Department
Zacharias Sautner ist Professor of Finance und Leiter des Finance Department an der Frankfurt School of Finance & Management. Seine Forschung wurde in führenden internationalen Fachzeitschriften wie dem Journal of Finance, dem Review of Financial Studies oder dem Review of Finance veröffentlicht. Er lehrt auf den Gebieten Corporate Finance, Unternehmensbewertung und Corporate Governance. Er hat verschiedene Forschungs- und Lehrpreise gewonnen.


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Cross-border mergers and acquisitions (M&A) have become increasingly important, comprising, in terms of deal value, about 40% of all M&A. Yet, cross-border deals are exposed to severe problems of adverse selection, as acquirers usually hold worse information than sellers. As a result, stock prices of foreign acquirers often respond negatively to acquisition announcements, reflecting concerns among investors about a transaction. Theoretical work has shown that information signals can reduce such adverse selection problems, as they may signal to the market that a deal is likely to create value.

In a paper with my coauthors Mark Humphery-Jenner and Jo-Ann Suchard, we study the signaling role of ‘PE backing’, which is a situation where a private equity (PE) firm has an ownership stake in an acquirer. We develop and test a set of hypotheses.

First, we hypothesize and document that PE backing in cross-border M&A is a signal of deal quality. As such, the PE backing of acquirers positively shapes the market’s perception of a deal’s quality, and we find that deals with PE backing are met with higher acquirer returns upon announcement. However, we document that this effect is only present if targets are in poor information environments—this is plausible as signaling is most important in such contexts.

Second, we hypothesize that PE backing can be a positive market signal when a target is in a poor information environment because of the PE firm’s experience and networks that results from prior deals in the target country. The reason is that access to a PE firm’s deal experience and networks can enable an acquirer to successfully identify and evaluate a foreign target. This increases the probability that a deal creates value (e.g., from strategic or financial synergies), but it can also reduce the likelihood that value is destroyed (e.g., due to overpayment or failed post-merger integration). Therefore, we predict and find that the benefit of the PE-backing signal in weak information environments increases with the number of previous deals that a PE backer has performed in the target country.

Third, we show that the operating performance of PE-backed acquirers increases after purchasing a target in a poor information environment. This indicates that the positive market signal upon the announcement of a PE-backed deal correctly reflects the anticipation of future value creation.

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