Venture Capital and Method of Payment in Mergers and Acquisitions

Abstract

We show that Venture Capital (VC)-backed targets receive a significantly higher fraction of stock and a greater likelihood of all-stock offers than non-VC-backed targets, even after controlling for self-selection bias, differences between VC-backed and non-VC-backed targets, and VC information bridge-building. Additionally, VC-backed targets receive a larger fraction of stock when the acquirer is young and risky, and has high growth rate, large investment and potential managerial improvement. Independent VCs, reputable VCs and VC syndicates who are capable of monitoring and advising accept a larger proportion of stock. We also document that the acquirer’s short-term and long-term returns are more positive when VC-backed targets choose stock payment. Altogether, our results indicate that VCs strategically hold shares of acquirers who meet their investment preferences and contribute to their performance.

Keywords: Venture Capital, Method of Payment, Merger and Acquisition

JEL Classification: G24, G34