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
Date Written: September 2016
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: Suggested Citation