Buy and Build Strategies in Private Equity: Boost or Transformation?

56 Pages Posted: 31 Aug 2016 Last revised: 4 Nov 2016

See all articles by Benjamin Hammer

Benjamin Hammer

HHL Leipzig Graduate School of Management

Heiko Hinrichs

HHL Leipzig Graduate School of Management

Denis Schweizer

Concordia University

Date Written: October 31, 2016

Abstract

This paper presents a first examination of how private equity (PE) fund managers actively develop their portfolio companies through so-called “buy-and-build” strategies (B&B), in which a portfolio company serves as a platform for add-on acquisitions. We argue that, because of holding period constraints, PE fund managers face a trade-off between the quantity and complexity of add-on acquisitions. Thus, in comparison to their peers, portfolio companies could do more, but similar, acquisitions (the “boost hypothesis”) or as many, but different, acquisitions (the “transformation hypothesis”). Using a control group of non-PE-owned companies, we find strong support for the “boost hypothesis.” Difference-in-differences estimates show that the probability of an acquisition is almost doubled after PE entry. However, we find no statistically significant differences in the complexity of acquisitions between PE- and non-PE-owned firms. This holds true for several complexity measures of domestic and cross-border acquisitions. Finally, we investigate whether buyers pay a premium for this acquisition boost. We find that deals with B&B yield significantly higher multiples at exit, with this effect being driven largely by cross-border B&B strategies.

Keywords: Buy-and-Build, Cross Border Acquisition, Internationalization, Private Equity

JEL Classification: G24, G3

Suggested Citation

Hammer, Benjamin and Hinrichs, Heiko and Schweizer, Denis, Buy and Build Strategies in Private Equity: Boost or Transformation? (October 31, 2016). Available at SSRN: https://ssrn.com/abstract=2832444 or http://dx.doi.org/10.2139/ssrn.2832444

Benjamin Hammer

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, 04109
Germany

Heiko Hinrichs

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, D-04109
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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