How does Private Equity Bid in Corporate Asset Sales?

Abstract

We model the decision by private equity to bid for corporate assets, and analyze interactions between the bidding of private equity and strategic buyers. The model predicts that seller gains depend on the type of buyer. The aggressiveness of private equity bidding is related to expectations about its ability to enhance the value of the asset and to successfully exit from its investment. The model also predicts a relationship between the gains in the enterprise value of the asset while owned by private equity, the type of exit transaction, and the gains to the original seller of the asset. Empirical tests show that private equity deals generate greater seller returns relative to sales to strategic buyers and that the gains to firms that sell assets to private equity are related to type of exit transaction and the subsequent increase in the asset's enterprise value, which exceeds that of benchmark firms. The evidence supports the view that private equity has valuable restructuring skills.

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