Matchmaking and Rent Seeking: An Empirical Analysis of Mergers of Venture-Backed Companies

34 Pages Posted: 27 Mar 2008 Last revised: 8 Jun 2009

See all articles by Radhakrishna Kamath

Radhakrishna Kamath

University of Pennsylvania - The Wharton School; Securities and Exchange Commission (SEC)

Jinghua Yan

SAC Capital Advisors; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: May 2, 2009

Abstract

Venture capitalists claim to add value to their portfolio companies through their extensive networks. This paper documents a rent-seeking behavior that accompanies this VC keiretsu effect. Using a sample of 570 mergers between venture-backed companies, we find that deals in which the acquirer and target are backed by a common venture investor are followed by substantially worse stock returns and operating performance for the acquirer, after controlling for an array of deal characteristics. Moreover, venture-backed acquirers pay higher multiples for targets backed by a common VC. Finally, stock (as the method of payment) is chosen more often in mergers of companies backed by a common VC. Our results suggest that while VCs facilitate the matching of merging firms, they also use their influence to extract rents from acquirer shareholders.

Keywords: Venture Capital, Mergers and Acquisitions

Suggested Citation

Kamath, Radhakrishna and Kamath, Radhakrishna and Yan, Jinghua, Matchmaking and Rent Seeking: An Empirical Analysis of Mergers of Venture-Backed Companies (May 2, 2009). Available at SSRN: https://ssrn.com/abstract=941895 or http://dx.doi.org/10.2139/ssrn.941895

Radhakrishna Kamath

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Jinghua Yan (Contact Author)

SAC Capital Advisors ( email )

330 Madison Avenue, 35th Floor
New York, NY 10017
United States

University of Pennsylvania - Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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