Acquisitions by private equity (PE) firms have gained prominence in recent years. Many of these acquisitions have been conducted by “clubs,” where a number of PE firms join together to submit a single bid. We present a novel analysis of the economics of club bidding by private equity firms based on the notion that club formation may create value at the target firm by allowing the different dimensions of value creation of each individual PE firm to be aggregated by the club. The tradeoff is that forming a club decreases competition since it reduces the number of firms that submit a bid for the target. Taking the number of bidders as exogenous, we show that when there is a sufficient number of PE firms, allowing a club to form benefits not only its members but also the target shareholders. However, we also show that when bidding is costly and bidder entry thus endogenous, club formation will generally be bad for the seller. Combining these two sets of results, our findings are useful for understanding the recent evidence analyzing the pro- or anti-competitive effects of club bidding behavior.

The Erasmus Finance Seminar is jointly sponsored by ERIM and the Tinbergen Institute.