Value creation in Finnish private equity buyouts 2007-2013 measured through operational improvement

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School of Business | Master's thesis
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Date
2017
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
61
Series
Abstract
Private equity has grown to be a major asset class and a significant player in the global M&A markets, controlling 17% of the global M&A market 2005-2007. Plenty of research has been done on the public-to-private deals done in the US and UK in the 1980s an onwards. Value creation in private equity seemed to stem from the aggressive use of leverage and offering better corporate governance by aligning management and ownership incentives. However, private equity has grown to record volumes since the 1980s and there is relatively little research on how the industry has scaled and how its value creation strategies have changed, as it has expanded to new countries and smaller size companies owned by private entrepreneurs, other private equity funds or carved out divisions of larger enterprises. I study private equity value creation strategies in Finland, a fruitful country due to the uniquely widespread prevalence of private equity. My sample is 339 buyouts in Finland between 2007 and 2016 of which I have analysed 59 buyouts that have financial data available. I study the pre- and post-buyout operational improvement of the companies via growth and profitability improvement. I find that sales growth is the main determinant of operational improvement. Somewhat contrasted with the literature, EBIT-% development during the first two years is negative, likely due to non-recurring integration costs of add-on acquisitions or frontloading of capital and operational expenditure required for growth. There is a small and possibly significant post-buyout rebound effect of EBIT margin deterioration for companies that had high pre-buyout EBIT margin improvement, possibly due to unsustainable EBIT enhancement before selling the company. I also find indicative support for the merger waves theory, in that EBIT margin improvements is especially high for companies acquired during high M&A activity years. Based on existing literature, companies with operational improvement potential are sold in larger quantities during M&A peaks.
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Thesis advisor
Nyberg, Peter
Keywords
mergers and acquisitions, private equity, merger waves, yrityskaupat, pääomasijoittaminen, fuusioaallot
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