The Effect of Family Ownership on Acquisition Value: Evidence from Northern Europe: An Exploration Into the Relative Acquisition Value of Private Family Firms in Northern Europe

Abstract

The global economy is currently facing the largest wealth transfer in history, as the “baby boomer” generation is retiring, necessitating their wealth to be transferred to the next generation. This leaves a big decision for a magnitude of family owners, who have to decide whether the future of their firm lies in the hands of an heir or rather an external owner. At the same time, M&A activity has increased at unprecedented rates in recent years, why family firms are becoming increasingly important acquisition targets. Nonetheless, current literature cannot reach agreement in determining the value-effect of family ownership, and lacks research on the value of family firms in an acquisition context. This thesis sheds light on this and contributes in two ways. Firstly, by investigating whether family firms have historically been acquired at a premium or discount relative to non-family firms, and secondly, by examining specific family firm- and transaction characteristics that have impacted the size of this discount/premium. Based on different theoretical paradigms and a thorough review of previous literature, the paper derives a conceptual model that is tested in an empirical setting. The empirical investigation utilizes a sample of 110 private, Northern European family firms and 404 private non-family firms. Using a multiple valuation approach and a relative discount calculation, the paper finds that private family firms in Northern Europe have historically been acquired at a discount compared to non-family firms. Moreover, by utilizing a multiple regression analysis, the thesis provides evidence on three factors that have affected the size of the relative family firm discount: (I) Family firms with multiple family members active in the firm have traded at a larger discount than firms with only the founder present. (II) Family firms with a family CEO have traded at a larger discount than firms with an external CEO. (III) Family firms in which the family has kept a minority stake have been acquired at a at a larger discount compared to when the entire stake has been sold. The paper discusses four potential reasons for the existence of a discount; (I) Family firms are seen as a more risky investment. (II) Family firms are perceived as unprofessional, inefficient, and mismanaged. (III) A selection bias exists in family firm acquisitions, implying that underperforming family firms have a higher probability of being transacted. (IV) Family owners have less M&A experience, and thus lower realized valuations. Based on previous literature, the conceptual model, and the empirical findings, this thesis offers important implications for family owners and potential buyers. For family owners, this thesis suggests that they should optimize the firm in the eyes of the acquirer when preparing for a sale. They can do this by lowering family dependency in the firm and increase professionalism. By doing so, they could increase the likelihood of a sale and potentially even increase the acquisition price. For buyers looking to acquire a family firm, this thesis suggests that they should consider the nature of ownership in their valuation of targets. Moreover, buyers who consider acquiring a family firm, should spend time on building relationships with the family and consider partnership deals to gain preferred buyer status and obtain a favorable price