Stepping over corporate venture capital’s toeholds: do third-party acquirers benefit from CVC’s involvement in their targets?

Established firms often rely on acquisitions of private entrepreneurial firms to access new technologies. Some of these private target firms are partially funded in the pre acquisition period by the venture arms of other established firms called Corporate Venture Capital (CVC). Theoretically, CVC’s toehold position can have opposing effects on the value of target firm to its future third-party acquirer (an acquirer without a toehold position). On the one hand, target firm can learn from the experience and implicit guidance of CVC investors in its formative years, making it a better target for its future acquirer. On the other hand, CVC investors can learn about the target’s new technology in the pre-acquisition period. Moreover, CVC investors can mold the target to serve their own strategic purposes. These two factors erode target’s value for any future third-party acquirer. Our study is the first to provide empirical evidence on the net effect of these competing forces. We show that, on average, the relationship between CVC’s toehold position and third-party acquirer’s Cumulative Abnormal Returns at merger announcement is positive. However, this positive relationship is moderated by acquirer’s R&D intensity. The gains to a low R&D intensity acquirer from acquiring an entrepreneurial company far outweigh negative effects of target’s technology appropriation by CVCs, while this is not the case for an acquirer with high pre-existing research capacity.