Sources of value creation through private equity-backed mergers and acquisitions : the case of buy-and-build strategies

Borell, Mariela ; Heger, Diana

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URN: urn:nbn:de:bsz:180-madoc-352489
Document Type: Working paper
Year of publication: 2013
The title of a journal, publication series: ZEW Discussion Papers
Volume: 13-094
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: G24 , G34 , L14,
Keywords (English): Private equity , buy-and-build
Abstract: This article documents a new value creation function of private equity investors who carry out buy-and-build strategies. Buy-and-build strategies constitute an initial acquisition of a firm, serving as a “platform”, by a private equity investor and follow-on private equity-backed acquisitions (“add-ons”). The investor merges the platform and add-ons into a single entity. Additionally to the selection of well performing firms by the investors prior to the transaction, we identify value-enhancing potentials which private equity investors explore through buy-and-builds. The investors bring together platforms with lower capacity utilization and lower returns, and add-ons with higher utilization and higher returns in order to allocate resources and capacity more efficiently and to improve firms’ performance. However, the buy-and-build strategies only have a positive impact on the profitability of firms with increasing industry adjusted utilization. Consequently the more efficient deployment of assets for the generation of sales drives the improved performance after buy-and-builds.

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