Becoming M&A Targets: Evidence from Small, Privately Held Firms

Abstract

We analyze a private firm’s likelihood of exiting through a merger or acquisition. To test our hypotheses we use the confidential version of the Kauffman Firm Survey data, the largest longitudinal dataset of newly formed businesses in the United States. Our results show that firms with R&D activity and those characterized by lower information asymmetry are more likely to become M&A targets. We also show that having intellectual property rights such as copyrights, patents and trademarks does not significantly affect the firm’s likelihood to exit through M&A. These results suggest that acquirers value the growth potential signaled through R&D rather than the existing intellectual property and therefore, firms with high quality innovations are the most attractive targets for acquisitions. The hypothesis that venture-backed firms are more likely to become M&A targets finds strong support in our analysis. Angels or venture capitalists have the first opportunity to liquidate some or all their equity holdings when the firm becomes an acquisition target. Our results also show that firms owned by serial entrepreneurs are more likely to become M&A targets. From an acquirer’s perspective, entrepreneurs with start-up experience are typically favored due to their proven ability to realize the growth potential of a venture as well as their willingness and ability to harvest value for themselves and their investors.