The Economics of Club Bidding in Private Equity

Many acquisitions by private equity (PE) firms are 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. We show that, when bidding is costly and bidder entry thus endogenous, club formation will generally reduce the premium target shareholders obtain from an acquisition. However, when there is a limited number of bidders with sufficient expertise or resources to acquire the target firm, allowing a club to form can benefits target shareholders when enough such bidders exist and bidding costs are relatively low. Our findings are useful for understanding the recent evidence analyzing the proor anti-competitive effects of club bidding behavior.