Do Private Equity Funds Always Pay Less? A Synergy-Related Explanation Based on Add-on Acquisitions

39 Pages Posted: 25 Oct 2015 Last revised: 16 Sep 2016

See all articles by Stefan Morkoetter

Stefan Morkoetter

University of St. Gallen - School of Finance

Thomas Wetzer

University of St. Gallen

Date Written: September 2016

Abstract

We assess the pricing of transactions undertaken by private equity (PE) funds in comparison to the transactions of strategic acquirers and sellers and focus on synergy gains as an explanatory factor. Controlling for company and deal characteristics, we show that PE funds pay 20% less, on average, than strategic buyers for comparable target corporations (we refer to this as the PE discount). Supplementing the existing literature on the PE discount in M&A transactions, we show that in add-on transactions, this PE discount disappears. When PE funds benefit from synergies, they are willing to pay the same price level as strategic acquirers would do in comparable transactions. In line with this synergy-related explanation, we find that PE funds sell their portfolio companies to strategic acquirers at prices comparable to those of strategic sellers. In divestitures to other PE funds (secondary deals), the PE discount prevails.

Keywords: Private Equity, Corporate Finance, Mergers and Acquisitions, Takeover Premiums, Synergies, Add-on Acquisitions

JEL Classification: G15, G30, G32, G34

Suggested Citation

Morkoetter, Stefan and Wetzer, Thomas, Do Private Equity Funds Always Pay Less? A Synergy-Related Explanation Based on Add-on Acquisitions (September 2016). University of St.Gallen, School of Finance Research Paper No. 2015/22, Available at SSRN: https://ssrn.com/abstract=2679186 or http://dx.doi.org/10.2139/ssrn.2679186

Stefan Morkoetter (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Thomas Wetzer

University of St. Gallen ( email )

Dufourstrasse 50
St.Gallen, CH-9000
Switzerland

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