Going Public to Acquire? The Acquisition Motive in IPOs
41 Pages Posted: 30 Jun 2008 Last revised: 14 May 2014
Date Written: June 30, 2008
Using a sample of IPOs from 1994 to 2004, we show that newly public firms make acquisitions at a torrid pace. This acquisition activity is fueled not only through the initial IPO proceeds, but also through the creation of an acquisition currency that is used to raise capital for both cash and stock financed acquisitions and through debt issuance subsequent to the IPO. The IPO allows companies to use potentially overvalued stock to pay for acquisitions, but also facilitates M&A by resolving uncertainty about the true value of the acquiror. We show that acquisitions play as significant a role in the growth of newly public firms as do R&D and CAPEX outlays. The patterns of acquisition activity following an IPO are important in explaining the evolution of ownership structure of newly public firms.
Keywords: IPOs, M&As
JEL Classification: G32, G34
Suggested Citation: Suggested Citation