Matchmaking and Rent Seeking: An Empirical Analysis of Mergers of Venture-Backed Companies
34 Pages Posted: 27 Mar 2008 Last revised: 8 Jun 2009
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
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