Buying Performance? The Impact of Multiple Arbitrage in B&B Strategies

Abstract

B&B strategies are increasingly popular, with past studies showing them to achieve superior returns. The question of how exactly B&B strategies create value is, however, still a "black box". Relying on a unique and proprietary sample of 161 B&B buyouts with valuation details on related add-on acquisitions, this study is, to the best of our knowledge, the first to decompose EBITDA growth as value driver into the organic, inorganic and the "sourcing" component. The "add-on sourcing effect" thereby considers the reduction of the average entry multiple caused by acquiring smaller firms in add-on transactions at multiples lower than the entry multiple for the platform company and labels the corresponding multiple uplift following the revaluation of add-on acquisitions post-closing. We find this effect to be a significant component of B&B buyout performance, contributing roughly 8% to the equity value CAGR. When eliminating it from the performance measurement, we find B&B outperformance to decrease significantly to the levels of their non-B&B peers. Finally, we find preliminary evidence that potential buyers of the buyout company do not seem to differentiate between the different sources of EBITDA growth.

Keywords: Private equity; buy-and-build; value creation; multiple arbitrage; equity value CAGR

JEL Classification: G23, G24, G32, G34