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Sources of value creation through private equity-backed mergers and acquisitions: The case of buy-and-build strategies

Mariela Borell and Diana Heger

No 13-094, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: This article documents a new value creation function of private equity investors who carry out buy-and-build strategies. Buy-and-build strategies constitute an initial acquisition of a firm, serving as a 'platform', by a private equity investor and follow-on private equity-backed acquisitions ('add-ons'). The investor merges the platform and add-ons into a single entity. Additionally to the selection of well performing firms by the investors prior to the transaction, we identify value-enhancing potentials which private equity investors explore through buy-and-builds. The investors bring together platforms with lower capacity utilization and lower returns, and add-ons with higher utilization and higher returns in order to allocate resources and capacity more efficiently and to improve firms' performance. However, the buy-and-build strategies only have a positive impact on the profitability of firms with increasing industry adjusted utilization. Consequently the more efficient deployment of assets for the generation of sales drives the improved performance after buy-and-builds.

Keywords: Private Equity; Buy-and-Build (search for similar items in EconPapers)
JEL-codes: G24 G34 L14 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cse
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