Product market conditions and the decision to acquire private versus public targets

Abstract

We examine how product market competition and predation risk impact a firm's decision to acquire a public versus a private target. We hypothesize that competitive pressures and predation risk impact a firm's risk tolerance and strategic objectives and, therefore, its inclination for a public or private target acquisition. We show that public target acquisitions are more likely than private target acquisitions in more competitive product markets and among firms with higher predation risk. In addition, firms that are industry leaders are more likely to acquire public than private targets. Altogether we find that firms facing higher competitive risks are more careful in increasing their business risk further. They are more likely to opt for public target acquisitions, which add less business risk and help to consolidate acquiring firm's position in the industry by increasing market share, scope, and improving cost efficiency after the takeover.

Keywords: Mergers and acquisitions, public and private target, product market conditions, acquisition outcomes.

JEL Classification: G34, L22, L25, O32