Buyout Transactions in the German‐speaking Region: Determinants of Abnormal Performance and Unlevered Returns

• Published date: 01 June 2018
• Author: Reiner Braun,Fabian Söffge
• DOI: http://doi.org/10.1111/jacf.12300
• Date: 01 June 2018

In This Issue: Notes from the Field

Investors as Stewards of the Commons? 8George Serafeim, Harvard Business School

Rethinking the Purpose of the Corporation 18 Edward J. Waitzer, Stikeman Elliott LLP

The ESG Integration Paradox 22 Michael Cappucci, Harvard Management Company

Building a Bridge between Marketing and Finance 29 Ryan Barker, BERA Brand Management, and Greg Milano,

Fortuna Advisors

“Big Data” Analysis: Putting the Data Cart Before the Modelling Horse? 40 Graham D. Barr, Theodor J. Stewart & Brian S. Kantor,

University of Cape Town

Debt Crisis Looming? Yes, Corporate Debt Expanded

but Don’t Panic Over the Prospect of BBB Downgrades

45 Martin Fridson, Lehmann Livian Fridson Advisors

Buyout Transactions in the German-speaking Region:

Determinants of Abnormal Performance and Unlevered Returns

50 Fabian Söffge and Reiner Braun, Technical University

of Munich

Processes and Accuracy of Cash Flow Forecasting:

A Case Study of a Multinational Corporation

65 Martin Glaum, WHU - Otto Beisheim School of Management,

Peter Schmidt, Justus-Liebig Universität Giessen, and

Kati Schnürer, Bayer AG & Justus-Liebig-Universität Giessen

An Empirical Study of Insurance Performance Measure 83 Sai Ranjani Bharathkumar, XLRI Jamshedpur, India

Valuation of Corporate Innovation and the Pricing of Risk in the

Biopharmaceutical Industry: The Case of Gilead

92 Richard Ebil Ottoo, Global Association of Risk Professionals

(GARP)

VOLUME 30 | NUMBER 2 | SPRING/SUMMER 2018

A P PLIED COR P O R ATE FINANC E

Journal of

50 Journal of Applied Corporate Finance • Volume 30 Number 2 Spring/Summer 2018

Buyout Transactions in the German-speaking Region:

Determinants of Abnormal Performance and Unlevered Returns

1. See Viral V. Acharya, Oliver Gottschalg, Moritz Hahn, and Conor Kehoe, “Corporate

Governance and Value Creation: Evidence from Private Equity,” The Review of Financial

Studies, Vol. 26 (2013).

2. See, for instance, Michael C. Jensen, “Eclipse of the Public Corporation,” Harvard

Business Review, Vol. 67 (1989); Steven Kaplan, “Management Buyouts: Evidence on

Taxes as a Source of Value,” The Journal of Finance, Vol. 44 (1989a); Steven Kaplan, “The

Effects of Management Buyouts on Operating Performance and Value,” Journal of Finan-

cial Economics, Vol. 24 (1989b); Abbie J. Smith, “Corporate Ownership Structure and

Performance: The Case of Management Buyouts,” Journal of Financial Economics, Vol. 27

(1990); and Chris J. Muscarella and Michael R. Vetsuypens, “Efciency and Organiza-

tional Structure: A Study of Reverse LBOs,” The Journal of Finance, Vol. 45 (1990).

3. Viral V. Acharya, Oliver Gottschalg, Moritz Hahn, and Conor Kehoe, “Corporate

Governance and Value Creation: Evidence from Private Equity,” The Review of Financial

Studies, Vol. 26 (2013).

4. See, for instance, Daniel Pindur, Value Creation in Successful LBOs (Wiesbaden,

Deutscher Universitäts-Verlag, 2007); Steven Kaplan, and Per Strömberg, “Leveraged

Buyouts and Private Equity,” Journal of Economic Perspectives, Vol. 23 (2009); Paul

Gompers, Steven N. Kaplan, and Vladimir Mukharlyamov, “What do private equity rms

say they do?” Journal of Financial Economics, Vol. 121 (2016); Benjamin Puche, Rein-

er Braun, and Ann-Kristin Achleitner, “International Evidence on Value Creation in Private

Equity Transactions,” Journal of Applied Corporate Finance, Vol. 27 (2015).

5. See Shourun Guo, Edi S. Hotchkiss, and Weihong Song, “Do Buyouts (Still) Create

Value?” The Journal of Finance, Vol. 66 (2011).

6. See Acharya et alia (2013).

7. Ann-Kristin Achleitner, Reiner Braun, and Nico Engel, “Value Creation and Pricing

in Buyouts: Empirical Evidence from Europe and North America,” Review of Financial

Economics, Vol. 20 (2011)

8. See, for instance, Kaplan (1989a) or Muscarella and Vetsuypens (1990).

rivate equity sponsored leveraged buyouts have

become familia r in many countries including the

German-speak ing region known as the DACH,

made up of Germany, Austria, and Switzerland.

Major acquisitions by private equity rms in t he DACH

include Kabel Deutschla nd, a cable television company, and

Autoteile Unger (A.T.U.), an auto-parts company.

Even though private equity is politically very controver-

sial in the DACH region, little is actually known about what

really happens when private equity rms buy companies. We

were more interested in operational improvements at the

buyout companies than in the greater nancial leverage used

by PE owners. So, we looked at sales growth, EBITDA margin

(EBITDA/sales) improvements, and changes in the Enterprise

Value (EV) to EBITDA ratio. Furthermore, we tried to under-

stand how performance changed with the private equity (PE)

business model and transaction sizes, and whether the inuence

of these factors changed after the nancial crisis in 2008.

We focused on unlevered equity returns a nd abnormal

operational performance, wh ich we call operational a lpha.

e impact on a company’s development and returns cannot

be told by simply observing change s in returns over the

holding period. So, we benchmarked cha nges at PE-owned

rms with comparable public companie s in the same industry.

To this end, we looked at the return on equity of a hypotheti-

cal unlevered (100% equity-nanced) buyout trans action and

computed the unlevered equity IR R for each buyout transac

-

tion, in order to make fair comparisons. We unlevered the

equity returns to obtain a l ike-for-like measure showing the

dierence in abnormal performa nce (operational alpha). 1

Initial studies in t he late 1980s and early 1990s revealed

that private equity creates additiona l value during ownership.2

But in a 2013 paper,

3

New York University Professor Viral

Acharya a nd colleagues a rgued that researchers now needed

to re-examine t he value creation proposition of private equity

sponsors.4

Recently, researchers have found positive and signicant

returns for a sub-sample of 94 US public-to-private buyout

transactions, completed by 2005.5 Even though gains from

operational improvements are still positive they are substan-

tially smaller compared with the rst wave of deals in the

1980s and not always statistically signicant. Another group

of researchers analysed a sub-sample of 234 European buyouts,

nding that sales growth, EBITDA margin increases, and

(relative to sector) EV/EBITDA multiple expansion drove

abnormal performance.6 ey also found signicant dier-

ences in performance between organic and inorganic deals.

Inorganic deals are those in which the private equity rm

rst acquires a so-called platform company and subsequently

acquires additional companies to merge with the platform. is

private equity business model is also called “buy-and-build.” By

contrast, organic deals seek growth without acquiring add-on

companies. Other researchers analysed a global sub-sample of

603 buyout transactions and found various deal- and industry-

specic variables impacted equity IRR.7

None of the afore-mentioned studies focused on the

DACH region specically or studied acquisitions after the

nancial crisis, however. Although some previous studies

looked at either very large or at public-to-private transactions,

8

such transactions are relatively uncommon in the German-

speaking region.

To get insight into the private equity business as it is done

right now, in the present, we gathered a new proprietary dataset

of 124 leveraged buyout transactions carried out in the DACH

region between 1995 and 2010. We gathered detailed informa-

tion at both buyout company level and investor level.

P

by Fabian Söffge and Reiner Braun, Technical University of Munich