Insights at UBC Sauder

Private acquisitions ultimately better for the bottom line

Posted 2017-04-03

New research from the UBC Sauder School of Business is challenging the view that acquiring publicly-traded rather than private companies results in better returns.

The study, co-authored by UBC Sauder economics professor James Brander, found that organizations looking to buy out other ventures fair better financially when they acquire privately-held companies – despite the fact that organizations know less about private firms before buying them.

“Although the market for private acquisitions is large and important, the impact of these acquisitions on both the venture and the acquiring company hasn’t been studied in great detail,” explains Brander. “By exploring the phenomenon of the winner’s curse, we were able to determine that private acquisitions are more beneficial to both the target and acquiring company. The result is a clearer picture of the acquisition market and entrepreneurial finance as a whole.”

Brander’s study is one of the first to draw attention to a likely winner’s curse in private acquisitions, which happens when the winning bid in an auction tends to exceed the value of the item purchased.

Through an analysis of over 22,000 acquisitions of private companies between 1985-2015 and more than 3,500 acquisitions of publicly-traded U.S. targets over the same time period, Brander found that a winner’s curse existed for private acquisitions. However, it was significantly weaker than for public acquisitions, meaning that on average, acquiring firms lost more money when buying publicly-traded companies as opposed to private firms.

“This finding could be due in part to the nature of public auctions, which tend to involve multiple bidders and overbidding – something that doesn’t necessarily happen in private acquisitions,” Brander says. Another possible factor is that acquirers of private companies are typically “serial acquirers” who are very experienced in the acquisition process. For example, the most prolific acquirers in recent years have been companies like Facebook and Google, who rely on buying small software companies for much of their product development and have become very good at it.


James Brander is a professor in the Strategy and Business Economics Division at the UBC Sauder School of Business, and also holds the Asia Pacific Professorship in International Business and Public Policy.

His study, “The winner’s curse in acquisitions of privately-held firms” is forthcoming in The Quarterly Review of Economics and Finance. It was co-authored by Edward J. Egan, director of the Baker Institute’s McNair Centre for Entrepreneurship and Innovation at Rice University in Houston, Texas.