Public Takeovers and Sell-Side Advisory: To which extent are investment funds likely to pay higher premiums compared to strategic buyers? A study based on the Benelux region

Abstract

Elon Musk's recent acquisition of Twitter for $43.4 billion has caught the attention of the business world. This acquisition has been backed by several Private Equity funds who expect to generate significant returns from the operation. The event has highlighted the practice of Leveraged Buy Outs and the impact they can have on the premium paid over a share price. In the past, extensive research has been conducted to determine whether Private Equity or Strategic Buyers were able to offer the highest bid and hence, a larger premium in M&A transactions. It was widely believed that Strategic Buyers had an advantage as they could incorporate potential future synergies in their offer. In contrast, Private Equity funds had a target IRR to reach and had to negotiate the price down to achieve it. However, in recent years, a new phenomenon has emerged in the global economic context; a near 0% interest rate environment where debt is cheap, and thresholds to reach target IRR are lower. This has allowed more and more Private Equity funds to outbid strategic players, which raises the question: Are Private Equity funds still unable to outbid Strategic Players in the current economic context? To answer this question, a study conducted on 106 public takeovers that occurred during the period from 2010 to 2022 in the Benelux region was performed. A regression analysis was implemented to determine which type of buyer was able to offer the largest bid. To control for external factors that might drive the premium higher or lower, a thorough review of the literature was conducted. Previous researchers have identified a set of explanatory variables that try to explain the variation in premia. Company-specific variables such as profitability, perceived undervaluation, size, R&D expenses, and leverage have a significant impact on the premium offered. On the other hand, other deal variables such as geographic location, stake acquired, and industry form buyers and targets need to be considered as well. The results of the regressions showed that from 2010 to 2022, Private Equity funds were able to outbid Strategic players. This period coincides with an extended time of Quantitative Easing and low-interest rates where Private Equity funds capitalized on low-cost debt to use leverage and drive returns. Additionally, this environment fostered Private Equity activity, resulting in several funds owning thousands of portfolio companies and eventually being able to factor potential synergies into their offer. Their extensive expertise in their industry of predilection usually allowed them to expect larger synergies, resulting in larger offers. Moreover, Private Equity funds have evolved over time and become more sophisticated in their deal-making capabilities, including their ability to incorporate potential future synergies in their offer through buy-and-build strategies. This evolution has made Private Equity funds more competitive in the M&A market and allowed them to outbid Strategic players. In conclusion, Elon Musk's acquisition of Twitter has highlighted the practice of Leveraged Buy Outs and the impact they can have on the premium paid over a share price. The study conducted in this thesis shows that in recent years, Private Equity funds have been able to outbid Strategic Players, thanks to the current economic context and their increasing sophistication in deal-making capabilities.