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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