What is different about private equity‐backed acquirers?

Abstract

This paper investigates whether private equity (PE)‐backed acquirers have a “parenting advantage” in the mergers & acquisitions (M&A) market. We employ a sample of 788 PE‐backed firms and a carefully matched control group of 6,652 non‐PE‐backed peers, for which we observe the entire acquisition history over a 19‐year time span. Difference‐in‐differences estimates suggest that PE backing induces a sizeable but short‐lived boost to acquisition activity, while the type and complexity of acquisitions are similar to those of non‐PE‐backed peers. These results are consistent with the idea that PE backing enhances execution and speed in the M&A market. We find that portfolio firms benefit from this boost through improved valuations and margins. The extent to which this is true, however, depends on the institutional setting of the PE owner. Our results indicate that add‐on acquisitions are detrimental if PE owners are late buyers or suffer from limited attention problems.

Pricing and value creation in private equity-backed buy-and-build strategies

“…PE firms actively source add-ons and are responsible for most of the decision-making regarding add-ons. This suggests that, in line with Hammer et al (2022), PE firms do not simply select high quality platforms, but transfer knowledge to make the B&B strategy successful.…”

“…To construct a global sample of PE buyouts, we follow prior literature and use Bureau van Dijk's (BvD) Zephyr database (e.g., Bansraj et al, 2020;Hammer et al, 2017;Hammer et al, 2022;Rigamonti et al, 2016;Tykvová & Borell, 2012;Wang, 2012). Zephyr is known to have good coverage of private firm acquisitions (Erel et al, 2015).…”

“…This allows PE owners to create a dominant market leader and reap the benefits of economies of scale and scope (Castellaneta et al, 2019;Wright et al, 2001). The extant literature suggests that B&B strategies boost returns (Acharya et al, 2013;Cohn et al, 2022;Hammer et al, 2022;Nikoskelainen & Wright, 2007;Valkama et al, 2013). Yet little is known about how price setting and value creation in B&B strategies actually work.…”

“…Another benefit is that the seller management can be used as an ex ante sounding board to validate the investment hypothesis and thereby improves the likelihood of a successful deal closure. Bansraj et al, 2020;Cohn et al, 2022;Hammer et al, 2017;Hammer et al, 2022;Heisig et al, 2022;Nikoskelainen & Wright, 2007;Smit, 2001;Smit & Moraitis, 2010;Valkama et al, 2013;Wright et al, 2001). We also believe we are the first to disentangle the sources of value creation, and show that top-line growth as well as multiple expansion explain significantly higher IRRs.…”

Performance Assessment of “Buy-and-Build” Strategies Applied in Digital-Driven Corporate Venturing

“…In turn, the buy-and-build strategy has been evolving steadily since the pre-2008 crisis without sharp spikes in activity. Buy-and-build strategies have been gradually increasing in the PE industry's reliance on them (Hammer et al, 2021). But there is still no systematic evidence in the literature on whether this strategy is consistent with the stated goal of long-term growth.…”