Company

INTRODUCTION

The volume of acquisitions involving privately held targets far surpasses that of publicly traded firms. Based on the SDC database, we find that between 60 and 75 percent of the firms acquired in the United States between 2000 and 2004 were privately held. Other studies find similar results across longer time periods and countries (Moeller, Schlingemann, and Stulz, 2004; Faccio, McConnell, and Stolin, 2006). Yet, despite some notable exceptions (Graebner and Eisenhardt, 2004; Graebner, 2004; Reuer and Ragozzino, 2007), acquisitions of private firms remain largely unexplored. Most existing studies of mergers and acquisitions (M&A) performance have focused on acquisitions of public targets by public acquirers (Chatterjee, 1986; Singh and Montgomery, 1987; Lubatkin, 1987; Seth, 1990).

I. Introduction

The importance of potential competition as a constraint on market power has been recognized in the industrial organization literature at least since work by Bain. Subsequent economic theory has formalized the relationship between firms not currently producing in an industry and market performance, and considerable empirical evidence confirms the role of such firms. Indeed, current U.S. merger policy has elevated entry conditions to co-equal status with concentration among incumbent firms as factors determining competitive effects and likely policy: A merger or acquisition between firms in a concentrated market may well be permitted if the prospects for entry into the industry can be shown to be timely, likely, and sufficient to restore the pre-merger degree of competition.