Do Private Equity Consortiums Facilitate Collusion in Takeover Bidding?

Abstract:     
We analyze the impact of the growing presence of private equity bidders on the level of competition in corporate takeovers in the United States. In particular, we address the question as to whether the joint bidding by private equity consortiums facilitates collusion in the corporate takeover market. We study a sample of 870 takeovers of publicly traded targets in the 2003 to 2007 period. We find that that both single private equity bidders and private equity consortiums are associated with significantly greater levels of takeover competition than other types of bidders. And while we find some evidence that target abnormal returns are lower in private equity consortium deals for narrow event windows around the initial takeover-related announcement date, we also find that these results do not hold for longer event windows that better account for differences in the takeover process across types of bidders. Analysis that controls for the endogenous selection of private equity consortiums also fails to find any negative effects of consortiums on either takeover competition or target returns. We interpret the evidence to reject the argument that the formation of consortiums by private equity bidders facilitates collusion in the corporate takeover market and to be consistent with a competitive explanation for consortium formation. We also study the impact on takeover competition of recent contractual innovations such as go-shop provisions and staple financing that are used in private equity deals.

Keywords: takeover auctions, private equity, joint bidding, consortiums, staple financing

JEL Classifications: G34, D44

Working Paper Series