Do Private Equity Firms Pay for Synergies?

59 Pages Posted: 23 Sep 2018 Last revised: 19 Nov 2018

See all articles by Benjamin Hammer

Benjamin Hammer

HHL Leipzig Graduate School of Management

Nils Janssen

HHL Leipzig Graduate School of Management

Denis Schweizer

Concordia University

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Date Written: November 17, 2018

Abstract

Stylized facts suggest that strategic acquirers can pay for synergies, while private equity (PE) firms cannot because of the missing operating fit with the portfolio company. However, if PE firms initiate buy-and-build strategies, there is potential for an operating fit between the portfolio firm and its add-on acquisitions. Thus, synergistic value could be priced in at entry. We analyze the pricing of 1,155 global PE buyouts and find strong support for a valuation effect from buy-and-build strategies. Our results indicate that PE sponsors pay a premium of up to 47% at entry when the portfolio company acquirers add-ons in the same industry within a two-year time window after the buyout. Consistent with bargaining power theory, the effect strengthens when the portfolio firm has acquisition experience, and when the PE sponsor faces pressure to invest because of unspent fund capital (referred to as “dry powder”) or deal competition. These findings remain robust after addressing alternative explanations, endogenous selection, and reverse causality. They have important implications for the literature on strategic versus financial bidders in takeovers.

Keywords: private equity, leveraged buyouts, M&A, buy-and-build, synergies, entry pricing

JEL Classification: G23, G24, G32, G34

Suggested Citation

Hammer, Benjamin and Janssen, Nils and Schweizer, Denis and Schwetzler, Bernhard, Do Private Equity Firms Pay for Synergies? (November 17, 2018). Available at SSRN: https://ssrn.com/abstract=3244189 or http://dx.doi.org/10.2139/ssrn.3244189

Benjamin Hammer (Contact Author)

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, 04109
Germany

Nils Janssen

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, 04109

Denis Schweizer

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

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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