Inorganic Growth Strategies and the Evolution of the Private Equity Business Model

77 Pages Posted: 10 Oct 2013 Last revised: 19 Jul 2017

See all articles by Benjamin Hammer

Benjamin Hammer

Lancaster University - Department of Accounting and Finance; Lancaster University Leipzig

Alexander Knauer

Handelshochschule Leipzig (HHL)

Magnus Pflücke

HHL Leipzig Graduate School of Management

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Date Written: March 31, 2017

Abstract

This paper investigates inorganic growth strategies in PE buyouts where the portfolio firm, which has been acquired in the initial buyout, serves as a platform for subsequent add-on acquisitions. We analyze a comprehensive sample of 9,548 buyouts and 4,937 add-on acquisitions spanning 16 years of buyout activity in 86 countries. We find that the probability for add-on acquisitions is high if the PE sponsor is experienced and has reputational capital, if the portfolio firm is large, has M&A experience at entry and operates in an industry with moderate degree of fragmentation, as well as in case of favorable financing conditions. Similar factors also explain higher add-on productivity and faster add-on execution. On average, cross-border/industry diversifying inorganic growth strategies are most likely if the portfolio company already draws upon international/inter-industrial M&A experience at entry and if the PE sponsor frequently invests across borders/industries. Furthermore, our results indicate that add-on acquisitions increase the probability for exiting through IPO and secondary buyout. The effect on secondary buyouts is driven by deals where the subsequent PE owner continues the inorganic growth strategy of the previous buyout.

Keywords: Leveraged buyout, mergers and acquisitions, buy and build, add-on, bolt-on

JEL Classification: G23, G24, G34

Suggested Citation

Hammer, Benjamin and Knauer, Alexander and Pflücke, Magnus and Schwetzler, Bernhard, Inorganic Growth Strategies and the Evolution of the Private Equity Business Model (March 31, 2017). Journal of Corporate Finance, Vol. 45, August 2017, Pages 31-63, Available at SSRN: https://ssrn.com/abstract=2338115 or http://dx.doi.org/10.2139/ssrn.2338115

Benjamin Hammer (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Lancaster University Leipzig ( email )

Augustusplatz 1-4
Leipzig, 04109
Germany

Alexander Knauer

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, 04109
Germany

Magnus Pflücke

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, 04109
Germany

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance ( email )

Jahnallee 59
D-04109 Leipzig
Germany
+49-341-9851-685 (Phone)
+49-341-9851-689 (Fax)

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