Sources of Value Creation Through Private Equity-Backed Mergers and Acquisitions: The Case of Buy-and-Build Strategies

46 Pages Posted: 19 Nov 2013

See all articles by Mariela Borell

Mariela Borell

ZEW – Leibniz Centre for European Economic Research

Diana Heger

IHS Economics

Date Written: November 11, 2013

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.

Keywords: Private Equity, Buy-and-Build

JEL Classification: G24, G34, L14

Suggested Citation

Borell, Mariela and Heger, Diana, Sources of Value Creation Through Private Equity-Backed Mergers and Acquisitions: The Case of Buy-and-Build Strategies (November 11, 2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-094, Available at SSRN: https://ssrn.com/abstract=2356191 or http://dx.doi.org/10.2139/ssrn.2356191

Mariela Borell (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Diana Heger

IHS Economics ( email )

Bleichstr. 1
Frankfurt/Main
Germany

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