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Inorganic growth strategies and the evolution of the private equity business model

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  • Hammer, Benjamin
  • Knauer, Alexander
  • Pflücke, Magnus
  • Schwetzler, Bernhard

Abstract

This paper investigates inorganic growth strategies in PE buyouts where the portfolio firm, which has been acquired in the initial buyout, serves as a platform for subsequent add-on acquisitions. We analyze a comprehensive sample of 9548 buyouts and 4937 add-on acquisitions spanning 16years of buyout activity in 86 countries. We find that the probability for add-on acquisitions is high if the PE sponsor is experienced and has reputational capital, if the portfolio firm is large, has M&A experience at entry and operates in an industry with moderate degree of fragmentation, as well as in case of favorable financing conditions. Similar factors also explain higher add-on productivity and faster add-on execution. On average, cross-border/industry diversifying inorganic growth strategies are most likely if the portfolio company already draws upon international/inter-industrial M&A experience at entry and if the PE sponsor frequently invests across borders/industries. Furthermore, our results indicate that add-on acquisitions increase the probability for exiting through IPO and secondary buyout. The effect on secondary buyouts is driven by deals where the subsequent PE owner continues the inorganic growth strategy of the previous buyout.

Suggested Citation

  • Hammer, Benjamin & Knauer, Alexander & Pflücke, Magnus & Schwetzler, Bernhard, 2017. "Inorganic growth strategies and the evolution of the private equity business model," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 31-63.
    • Handle: RePEc:eee:corfin:v:45:y:2017:i:c:p:31-63
    DOI: 10.1016/j.jcorpfin.2017.04.006
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    6. Benjamin Hammer & Heiko Hinrichs & Bernhard Schwetzler, 2018. "Does culture affect the performance of private equity buyouts?," Journal of Business Economics, Springer, vol. 88(3), pages 393-469, May.
    7. Timothy J. Richards & Bradley J. Rickard, 2021. "Dynamic model of beer pricing and buyouts," Agribusiness, John Wiley & Sons, Ltd., vol. 37(4), pages 685-712, October.
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    9. Benjamin Hammer & Nils Janssen & Bernhard Schwetzler, 2021. "Cross-border buyout pricing," Journal of Business Economics, Springer, vol. 91(5), pages 705-731, July.
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    16. Gemson, Josephine, 2021. "Private company acquisitions in the market for corporate control: A comparison between private equity and corporate acquirers," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 342-357.
    17. Paul Lavery & Jose-Maria Serena & Marina-Eliza Spaliara & Serafeim Tsoukas, 2021. "Private equity buyouts, credit constraints, and firm exports," Working Papers 2021_06, Business School - Economics, University of Glasgow.
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    More about this item

    Keywords

    Leveraged buyout; Mergers and acquisitions; Buy and build; Add-on; Bolt-on;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

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