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

64 Pages Posted: 30 Jul 2022

See all articles by Philipp Heisig

Philipp Heisig

HHL Leipzig Graduate School of Management

Jonas Kick

HHL Leipzig Graduate School of Management

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2022

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

Suggested Citation

Heisig, Philipp and Kick, Jonas and Schwetzler, Bernhard, Buying Performance? The Impact of Multiple Arbitrage in B&B Strategies (January 30, 2022). Available at SSRN: https://ssrn.com/abstract=4169612 or http://dx.doi.org/10.2139/ssrn.4169612

Philipp Heisig

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, 04109

Jonas Kick

HHL Leipzig Graduate School of Management

Bernhard Schwetzler (Contact Author)

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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