Do Private Equity Firms Pay for Synergies?

Stylized facts suggest that strategic acquirers can pay for synergies, while private equity (PE) firms cannot because of the missing operating fit with the portfolio company. However, if PE firms initiate buy-and-build strategies, there is potential for an operating fit between the portfolio firm and its add-on acquisitions. Thus, synergistic value could be priced in at entry. We analyze the pricing of 1,155 global PE buyouts and find strong support for a valuation effect from buy-and-build strategies. Our results indicate that PE sponsors pay a premium of up to 47% at entry when the portfolio company acquirers add-ons in the same industry within a two-year time window after the buyout. Consistent with bargaining power theory, the effect strengthens when the portfolio firm has acquisition experience, and when the PE sponsor faces pressure to invest because of unspent fund capital (referred to as “dry powder”) or deal competition. These findings remain robust after addressing alternative explanations, endogenous selection, and reverse causality. They have important implications for the literature on strategic versus financial bidders in takeovers