German Buyouts Adopting a Buy and Build Strategy - Key Characteristics, Value Creation and Success Factors

1. Introduction (p. 1)

1.1. Context of research topic

In recent years, the German market for whole company acquisitions by managers and/or private equity firms (so-called buyouts1) has become much more developed. The total volume and the number of completed transactions have increased significantly (see table 1). Since the number of private equity firms has also gone up (mainly due to the market entry of international players), the intensity of competition has grown contemporaneously.

As a consequence, private equity firms frequently face intense bidding competition for attractive target companies which has in turn led to higher acquisition prices. The utilisation of traditional value drivers, such as financial engineering, organic growth, or improved operating profit margin, is sometimes no longer sufficient to get both the bid accepted and to achieve attractive returns. This situation forces private equity firms to look for new value creation opportunities.

One possible solution is the adoption of a so-called buy-and-build strategy which aims to generate additional value, resulting especially from synergies through the merger of two or more companies. At first glance, buy-and-build strategies appear relatively easy to realise. However, given that mergers and acquisitions (M&,A) of socalled strategic buyers (i.e., corporations) have a disappointing track record with respect to value creation, the risk of failure in buy-and-build strategies must not be underestimated.

1.2. Research gaps and objective

The review of existing research reveals that the phenomenon of buy-and-build strategies in private equity is currently relatively undiscovered both in Germany and abroad. To the best knowledge of the author of this research project, none of the existing research contributions is based on a broad empirical study. Three areas represent the main focus of existing research: background information on the emergence of buy-and-build strategies in private equity, key characteristics of buyand- build strategies (e.g., relevant market, platform/target company, investment horizon, capital structure), and a brief outline of case examples.

Only very few researchers provide some insights into value creation, success factors, and risks. For a condensed overview of existing research on buy-and-build strategies, see appendix 1. Among the more advanced research existing, the areas of buyouts and M&,A are most closely related to the phenomenon of buy-and-build strategies (see chapters 2 and 3).

The main objective of this research project is to develop an in-depth understanding of the buy-and-build phenomenon. Therefore, the following research questions should be answered based on the results of an empirical study:

What are the key characteristics of buy-and-build strategies?

Do private equity firms on average manage to create value through adopting a buy-and-build strategy?

What are the key prerequisites for successful value creation in buy-and-build strategies?

What value drivers do private equity firms typically use to create value?

What are the key success factors for value creation in buyouts adopting a buyand- build strategy?