Buy and Build Strategies in Management Buyouts
Post-Acquisition Integration and the Contribution of Private Equity Firms
Masterarbeit 2013 58 Seiten
Table of Contents
2 Literature review
2.1 The resource-based view as theoretical lens
2.2 Private equity-backed buyouts
2.3 Buy and build strategies
2.4 Added value of PE investment and active ownership
2.5 Post-acquisition integration
3 Problem definition and research questions
4 Framework and propositions
4.1 A framework for integration management
4.2 Working propositions
5 Research design
6 Data collection
7 Case study results
7.1 Case study 1 (PE)
7.2 Case study 2 (PE)
7.3 Case study 3 (PE)
7.4 Case study 4 (portfolio company)
7.5 Across-case comparison
8.1 Extension and revision of propositions
8.2 Relevance of findings
9.2 Further research
Appendix I: Semi-structured interview questions
Appendix II: Summary of case study results
Recent changes in the market for private equity have led investors to shift their attention away from market beta and towards generating alpha through the exploration of growth opportunities. PE firms increasingly use active ownership to implement these new growth plans. Buy and build strategies have emerged as a feasible and lucrative strategy of active ownership. The add-on acquisitions required when pursuing this strategy and the need to create value through synergistic effects necessitate post-acquisition integration efforts. Despite its relevance, researchers in the field of strategic management and finance have paid little attention to buy and build strategies. Moreover, they have yet to bridge the findings by scholars and practitioners on post-acquisition integration and active ownership. This paper seeks to fill this gap by answering the research question of how PE firms contribute to the integration process and how they handle task and affective conflicts and exercise management control with regard to the cooperation between the PE firm and the management of the portfolio company.
Previous work has linked active ownership to capabilities and found that prior business experience is a strong predictor of active ownership, meaning a high level of contribution by the investment firm. This paper complements this work by analyzing active ownership of private equity firms in the context of post-acquisition integration in buy and build strategies and finds a direct link between capabilities and active ownership through four explanatory theory-building case studies. Birkinshaw et al. (2000)’s study on post-acquisition integration is used as a guiding concept in this paper. They distinguish between task integration, which is defined as the identification and realization of operational synergies, and human integration, which is defined as the creation of positive attitudes towards the integration and shared identity among employees. This paper creates a practical Framework for Integration Management on this notion and extends it by additional academic literature and relevant studies of consulting firms. A number of working propositions are derived from the literature and linked to the framework. Each proposition is then tested through within-case analysis and across-case comparison. Based on the evidence, three propositions are revised or extended whereas six propositions are supported. This paper shows evidence that PE firms contribute to task integration but largely refrain from human integration. Additionally, this paper argues that integration capabilities are crucial for a successful outcome of a buy and build strategy and drive the active and passive contributions of PE firms to the integration process. The evidence shows that task integration capabilities are important for short- and long-term investments with buy and build strategies, mainly because they help create synergies that are reflected positively in the exit value. Human integration capabilities are equally important in the long-term since a human integration facilitates successful task integration, particularly in a second integration phase. Moreover, human integration capabilities are especially valuable in buy and build strategies with people-dependent professional service firms or with customer-facing industries where company culture is crucial.
This paper suggests that from the perspective of the PE firm, there are three strategic options to ensure these capabilities: (1) The PE firm creates the capabilities in-house, (2) the PE firm selects investments where the management of the platform or add-on company provide the capabilities, or (3) the PE firm brings in external advisors that add the capabilities on a temporary basis. There are benefits and pitfalls to each option. This paper uses and extends Hoskisson et al. (2013)’s typology of PE firms to provide reasoning which strategic option to choose. The first is a long-term solution for large PE firms with strong financial resources that regularly apply buy and build strategies and thus benefit from scale effects. To what degree and with what kind of focus (task versus human integration capabilities) PE firms should create capabilities in-house also depends on their strategic investment focus. This paper argues that choosing this option can also lead to a sustainable competitive advantage. The second option is practical for smaller PE firms that only selectively employ buy and build concepts. It can also be used as an organizational learning strategy eventually leading to the acquisition of integration capabilities through a joint-venture type cooperation with the management. The third option is expensive in the long run and leads to the least learning for both the PE firm and the management but can act as a ‘quick fix’ solution.
This paper is relevant for scholars in the field of strategic management and finance in various ways. First, it extends previous work on active ownership and the creation of alpha. Second, it complements scholarly research highlighting the importance of post-acquisition integration as a key driver of the success of acquisitions. Third, this paper yields empirical results relevant for academics studying strategic decision-making in top management teams (TMT). Understanding the influence of PE investors on TMT decisions with regard to integration efforts contributes to this research stream.
Besides adding to scholarly research, this paper helps PE firms and managers of PE- owned portfolio companies currently pursuing buy and build strategies to prioritize in their post-acquisition integration efforts. It provides a practical framework capable of guiding managers through the integration process ensuring a holistic approach. Additionally, it can help managers to better cooperate with their PE-owners by managing the expectations related to the integration process and prevent conflicts. The findings of this paper might even impact the decision to seek PE investment for a buyout in the first place. The management of a company considering a buyout should carefully analyze the capabilities of each potential PE investor and evaluate their investment strategies. If buy and build concepts are suggested, it is crucial for the management to inquire about the PE firms’ integration capabilities and assess them vis-à-vis the company’s resources. It seems advisable in these cases to give preference to PE firms with strong operational teams.
The market for private equity-backed buyouts has changed since the credit crunch hit in 2008 and the EU sovereign debt crisis emerged in 2010. In order to produce persistent returns, private equity (PE) firms are shifting their attention away from market beta and towards generating alpha through the exploration of growth opportunities. This shift, in addition to other factors such as limited opportunities for mega-buyouts, high deal multiples, and aging portfolios, led PE firms to increasingly pursue so called buy and build strategies (Bain & Company, 2012). By bolting add-on acquisitions to a platform company, PE firms aim at increasing the exit value through growth and through the synergistic effects of the acquisitions. Whether the strategy is successful, particularly from the perspective of the portfolio company, most likely depends on the post-acquisition integration achieved. The inherent complicacy and long duration of post-acquisition integration combined with an oftentimes short to medium-term investment horizon of PE firms arguably impedes a successful buy and build strategy. Furthermore, it should be challenged whether PE firms have the incentive and the capabilities to contribute to the integration process, since exit values can already increase regardless of synergies1.
In contrast to studies that examine PE firms in terms of financial engineering or governance engineering, research about how PE firms contribute operational capabilities to their portfolio companies is limited. In particular, the question how PE firms contribute to post-acquisition integration in the context of buy and build strategies is under examined, despite the fact that many scholars and managers agree on the premise that all value creation happens in this process after the acquisition (Ashkenas & Francis, 2000; Haspeslagh & Jemison, 1991). This paper seeks to fill this gap by investigating the capabilities and strategic actions of three PE firms and one portfolio company in explanatory theory-building case studies. Moreover, this paper aims at creating a better understanding of how the PE firm and the management of the portfolio company cooperate and where possible areas of conflict lie with regard to post-acquisition integration.
This paper opens with a comprehensive review of the relevant literature in order to narrow down the problem definition. Following, the research gap is identified and broken down into specific research questions before a Framework for Integration Management is developed and working propositions are established. Next, embedded multiple case studies with two units of analysis are determined and motivated as the most appropriate research methodology before the working propositions are scrutinized in within-case analysis and across-case comparison. The remainder of this paper discusses the findings and elaborates on how they contribute to academia and managerial practice. Concluding, limitations and further research are examined.
2 Literature review
As introduced above, this paper focuses on post-acquisition integration in buy and build strategies and on the role PE firms play in this process. In order to position this problem definition in its academic context, identify the research gaps, and derive appropriate research questions in a logical fashion, a comprehensive overview of relevant literature is provided. First, the resource-based view is motivated as a theoretical lens. Second, private equity- backed buyouts are briefly introduced showing different angles taken in both finance and strategy research. Third, the scarce findings related to buy and build strategies in PE-backed buyouts are explained before important literature on the contribution and added value of PE investments is summarized with a focus on active ownership. Last, a review of post- acquisition integration research is provided that builds the base for the Framework for Integration Management developed in section 4.2.
2.1 The resource-based view as theoretical lens
In the resource-based view (RBV), resources are seen as the key to create sustained competitive advantage for the firm (Barney, 1991). This perspective provides a fitting theoretical lens for this paper in multiple ways: First, it helps explain buy and build strategies as an approach to expand a firm’s resource endowment. The resource-based view acknowledges the need for resources in order to implement growth strategies (Ireland, Hitt, & Sirmon, 2003). If these resources cannot be built internally with acceptable cost and in acceptable time, the firm considers acquisitions as growth strategy (Eisenhardt & Schoonhoven, 1996), which is precisely the rational behind buy and build strategies. Moreover, the RBV has been the most widely used perspective on acquisitions (Barney, 1988; Dierrickx & Cool, 1989; Rumelt, 1984; Wernerfelt, 1984). Second, it functions as a suitable theoretical lens to examine post-acquisition integration as it helps explain to which degree and with what outcome pre-existing resources are combined, dismissed, or replaced after the acquisition (Singh & Zollo, 1998). Third, the RBV offers insights into the cooperation between the PE firm and the management of the portfolio company and how they commit resources with regard to the post-acquisition integration process. In contrast to the transaction-cost view, the RBV shifts the focus from costs to value (Hoffmann & SchaperRinkel, 2001), which is the more suiting perspective when examining the contribution of PE firms (Bacon, Wright, & Demina, 2004). Thus, the resource-based view provides the theoretical lens for this paper. The remainder of this section will provide a brief overview of the relevant literature in finance and strategic management.
2.2 Private equity-backed buyouts
Private equity-backed buyouts have been studied from various angles. The finance and strategy literature has long focused its attention on an agency theory perspective where financial engineering and governance engineering drive value (Jensen, 1989; Kaplan & Strömberg, 2008; Smith 1990). Given this perspective, the PE firm applies three general instruments: incentives through managerial ownership, pressure through leverage, and control through board activity. The first method requires management to invest in the portfolio company in order to gain an equity stake. The increased upside potential and downside risk is significant (Acharya, Hahn, & Kehoe, 2009; Kaplan, 1989) and incentivize management to act in the interest of the portfolio company (Robbie, Thompson, & Wright, 1991). Leverage is the second instrument applied in PE-backed buyouts. The elevated pressure to repay debt forces the management to search for efficiency gains and to adopt an exploitative orientation (Crawford, 1987; Fox & Marcus, 1992; Jensen, 1989). Furthermore, financial leverage can lead to additional value via interest deductibles that allow for a tax shield (Graham, 2000). The third instrument pertains to the board of the portfolio company. PE firms exert control via active participation in board decisions (Kaplan & Strömberg, 2008). This regularly results in more frequent board meetings (Cornelli, 2008; Gertner & Kaplan, 1996) and higher CEO turnover (Acharya et al., 2009).
More recent research in the field of PE-backed buyouts has studied operational engineering (Kaplan & Strömberg, 2008) or active ownership (Bottazzi, Da Rin, & Hellmann, 2008) as a value driver. In addition to the above-mentioned instruments, PE firms adopt an approach that relies on their own industry and operating expertise, which is utilized by actively facilitating growth strategies in their portfolio companies (Kester & Luehrman, 1995). This approach shifts the focus away from market beta and towards generating alpha (Acharya et al., 2009; Fraser-Sampson, 2007). Growth strategies in PE-backed portfolio companies can result in an organic increase in (new) product development (Zahra, 1995; Wright, Thompson, & Robbie, 1992), non-organic expansion through add-on acquisitions, or both. Non-organic growth is regularly referred to as a buy and build strategy where PE firms invest in a platform company in a fragmented (niche) market with the plan to increase value through the consolidation of multiple synergistic add-on acquisitions. Put differently, “the investor acts as an industry consolidator” (Smit, 2001: 82). Buy and build strategies will be the focus of this paper and are thus examined in detail in section 2.3.
2.3 Buy and build strategies
Despite the recent above-mentioned academic interest in post-buyout growth in lieu of efficiency, little research attention has been devoted to buy and build strategies. Bacon et al. (2004) analyze the effects of management buyouts on human resource management and find that buyouts pursuing buy and build strategies are more likely to invest in employees due to an increase in product range and formal strategic planning. They further argue that buy and build strategies emphasize strategic reorientation over entrenchment and stimulate intra-firm knowledge transfer. Bacon, Wright, Meuleman, and Scholes (2012) assess the impact of PE firms’ short-term orientation and expect that buy and build strategies involve longer timescales compared to other buyout forms. Smit (2001) takes a finance perspective and develops a framework to evaluate buy and build strategies via real options and game theory. He provides three key benefits of buy and build strategies. First, the already explicated leverage effect leading to agency advantages and tax shields. Second, synergistic value such as scale and scope effects, amplified market power, and cost reductions. Third, access to more attractive exit opportunities due to increased maturity and size.
2.4 Added value of PE investment and active ownership
According to Smit (2001), there seems to be value created in a buy and build strategy, but does the PE firm contribute to this added value? Does active ownership play a role? In order to determine the contribution of the PE firm to the portfolio company in a buy and build strategy, it is essential to review the literature on the added value of PE investment. The majority of finance studies that focus on added value of PE-backed buyouts and their implemented strategies ultimately have financial returns for the PE firm or its fund investors as study subject (Lehn & Poulsen, 1989; Kaplan & Schoar, 2005). An alternative stream of literature takes the perspective of the portfolio company and usually investigates the performance of companies after the PE firm has exited. Unfortunately, the findings are ambiguous. Kraus and Burghof (2003) provide evidence suggesting that PE-backed companies outperform non-PE-backed companies in IPOs but underperform around and after the PE firm withdraws. Jenkinson and Ljungqvist (2001) anticipate this finding and explain it with a loss of insider information post-exit. Jelic (2008) examines operating performance of portfolio companies after the PE firm exits and his study exhibits significant improvements in output. He concludes that benefits of PE involvement can be long-term for portfolio companies. Cao and Lerner (2006) look at reverse leveraged buyouts (RLBO), a situation where a company goes public for the second time after going through a leveraged buyout. Their study considers stock market performance as measure for success post-IPO. Their findings show that RLBOs outperform the market in the first, fourth, and fifth year after going public; however, only if the PE investment longevity was longer than one year. Mian and Rosenfeld (1993) come to a similar conclusion. Holthausen and Larcker (1996) find contrary evidence for post-IPO stock returns but show a better accounting performance of RLBO firms, which they relate to inside ownership. Finally, in a study of 1,225 UK buyouts, Jelic and Wright (2011) determine that although buyouts exhibit long-term abnormal operating performance, PE-backed buyouts do not demonstrate any superior performance over non-PE-backed buyouts, neither post-buyout nor post-exit.
The ambiguity of the literature on post-exit performance of PE-backed portfolio companies may be explained by a difference in PE firms’ investment strategy. For example, Bottazzi et al. (2008) point out the difference between a ‘hands-off’ and a ‘hands-on’ approach of PE firms. As mentioned in section 2.2, some PE firms focus on financial engineering during the investment period, whereas others pursue more active ownership or operational engineering as a way to add value to the portfolio company. Acharya et al. (2009) investigate the effect of operational engineering and other measures of alpha on value creation and also study the cooperation between the PE firm and the management of the portfolio company. However, they only consider alpha with regard to financial value. In strategy literature, measures of non-financial value have also gained relevance in buyout research. Some studies analyze the effect of PE investment on social parameters such as employment (Amess & Wright, 2007; Bacon, Wright, Demina, Bruining, & Boselie, 2008; Davis, Haltiwanger, Jarmin, Lerner, & Miranda, 2008; Kaplan, 1989); others explore the concept of asymmetric information augmented by PE involvement (Kaplan, 1989; Ofek, 2004). The above-mentioned operational engineering or active ownership also led researchers to introduce a strategic entrepreneurship perspective that studies the explorative nature of PE- backed buyouts and extends the common agency perspective by drawing from the resource- based view (Meuleman, Amess, Wright, & Scholes, 2009; Wright, Hoskisson, & Busenitz, 2001). Wright, Hoskisson, Busenitz, and Dial (2000) apply this concept and find evidence that managerial incentives implemented through PE investment facilitate strategic innovation. Bruining and Wright (2002) examine active ownership of venture capital firms and how it adds value to entrepreneurial orientation. Their findings show that VCs stimulate entrepreneurial orientation of their portfolio companies by contributing to the selection of C- suite executives, shaping the leadership style of the CEO, advising on acquisitions, and bringing in external consultants to advise on strategy implementation.
Two central conclusions can be drawn from examining and combining the above literature on buy and build strategies in management buyouts and the added value of PE investment: (1) Buy and build strategies can create value and (2) PE firms can contribute to value creation through active ownership. The question remains how do PE firms add value in buy and build strategies. As Smit (2001) explains, a crucial part of the value creation process in a buy and build strategy is post-acquisition integration. The literature reviewed in section 2.5 emphasizes this importance. From an RBV perspective, post-acquisition integration reflects the degree to which pre-existing resources are combined, dismissed, or replaced after the acquisition in order to achieve a (sustainable) competitive advantage (Barney, 1991; Singh & Zollo, 1998). In a buy and build strategy, the PE firm can add value to this process by contributing its own resources and capabilities to the portfolio company through active ownership. Smit (2001) examines this but by taking a finance perspective he only focuses on financial value, e.g. created through synergies. The literature on post-acquisition integration, however, sees the added value of this process in more than just financial terms.
Studies of non-financial benefits and added value of buy and build strategies in PE- backed buyouts are rare. Moreover, viewing post-acquisition integration as the most crucial part of buy and build strategies is a novelty: buyout research has yet to study the added value of PE investors in the post-acquisition integration process. In order to investigate this research gap, it is imperative to first examine established literature on post-acquisition integration.
2.5 Post-acquisition integration
Next to the significance of the selection process ex-ante of the acquisition2 (see e.g. Haspeslagh & Jemison, 1991; Jemison & Sitkin, 1986), which only plays a peripheral role in this paper since it usually occurs in a PE-controlled process detached from the portfolio company, many studies have pointed to the importance of post-acquisition integration3 . Oftentimes the success of an acquisition depends on it, especially from a long-term perspective that deviates from the financial paradigm of stock returns as a measure of success. Empirical findings show that half to two-thirds of acquisitions fail (Olie, 1990); one third of those due to faulty integration (Kitching, 1973). Failure in integration can be accredited to various factors such as diverse motives and acquisition strategies (Shrivastava, 1986), complexity of the technology to be integrated, cultural mismatch (Buono, Bowditch, & Lewis, 1985; Jeminson & Sitkin, 1986), or a lack of prior experience with the integration process. The latter, however, shows inconclusive empirical results. Some studies agree that integration experience positively impacts performance (Bruton, Oviatt, & White, 1994; Fowler & Schmidt, 1989; Singh & Zollo, 1998); others have found no such evidence (Baum & Ginsberg, 1997; Lubatkin, 1987).
The manifold reasons for failure prove that post-acquisition integration is a complex issue and its process needs to be analyzed in greater detail in order to establish a framework employable for assessing whether and how PE firms pursuing buy and build strategies contribute to integration efforts.
Shrivastava (1986) examines the integration process and argues that three different types of integration can be achieved: integration of procedures, integration of physical assets, and managerial/sociocultural integration. Not all types of integration are always attained; however, he points out that this is neither recommended nor necessary. Zollo and Singh (2004) challenge this argument and find that more integration significantly enhances performance. Others argue that the optimal level of integration must be determined (Thompson, 1967). Datta (1991) relates organizational fit to the level of integration and tests for its impact on performance. Relating to Shrivastava’s (1986) typology, his results show that differences in procedures like reward and evaluation systems do not influence performance but managerial/sociocultural differences such as top management style do have an impact, regardless of the level of integration. Pablo (1994) analyzes the factors that influence post-acquisition integration design, focusing on task objectives, tolerance for cultural diversity, and potential for political action between the firms. He finds that all of these perspectives influence the level of integration chosen. Birkinshaw, Bresman, and Håkanson (2000) disregard Shrivastava’s (1986) second type of integration and observe only two distinct processes: (1) task integration and (2) human integration. “Task integration is defined as the identification and realization of operational synergies, and human integration is defined as the creation of positive attitudes towards the integration among employees on both sides” (Birkinshaw et al., 2000: 400). They find that successful integration occurs in two phases. First, quick task integration leads to a satisfying result that keeps the organizations at arm’s-length and initially focuses on achieving an acceptable performance in the individual operating units. Human integration evolves parallel but more slowly and facilitates cultural convergence and mutual respect. Despite being distinct processes, some interrelation between the task and human integration was detected: “A very low level of human integration will limit effectiveness of task integration as a driver of acquisition success” (Birkinshaw et al., 2000: 419). In accordance with this finding, the second phase exhibits renewed task integration building on the already established human integration and leading to increased interdependencies between the acquired and acquiring units.
Birkinshaw et al. (2000)’s distinction between task and human integration serves as a simple and suitable concept to concentrate this research on where PE firms add value to the process. Section 4.1 of this paper extends Birkinshaw et al. (2000)’s findings and implications for post-acquisition integration success by a more practically oriented viewpoint educed from relevant consulting studies, which is subsequently utilized to establish a new framework for integration management in order to investigate the research questions.
The following section summarizes the research gaps identified in the above literature review, defines the problem to be investigated in this paper, and derives appropriate research questions.
3 Problem definition and research questions
Buy and build strategies in PE-backed management buyouts as forms of active ownership have received little attention in academic research. In particular, taking a viewpoint that focuses on post-acquisition integration as the key driver of success in these strategies is new. It is unclear how PE firms contribute to this process and how they cooperate with the portfolio company. Who takes what role? Where are possible areas of conflict and how does the PE handle them? Who holds the expertise for the different integration tasks? How does the PE firm exercise management control? This paper therefore seeks to investigate this research gap and examine whether and how PE firms add value to the post-acquisition integration process. With the aid of academic post-acquisition integration literature and relevant practitioner perspectives available in consulting studies, this paper constructs a framework (see section 4.1) for the empirical assessment of four explanatory theory-building case studies (see section 5 for a motivation of this approach) to examine the following research questions:
1.a. What measures are critical in order to achieve successful post- acquisition integration?
1.b. Are these integration measures considered in PE-backed buyouts with buy and build strategies?
2.a. What integration measures do PE firms pursuing buy and build strategies initiate, e.g. in board meetings?
2.b. What integration measures do PE firms actively participate in and to what degree? Which do they outsource to external advisors? Which do they leave to the management?
2.c. How do the PE firm and the management of the portfolio company cooperate in the integration process? Where are possible areas of conflict? How do they exercise management control?
4 Framework and propositions
This section introduces a new framework for integration management. The framework depicts important aspects of the post-acquisition integration process and was used to derive appropriate interview questions. Furthermore, a number of working propositions are established in this section that guide the empirical portion of this paper.
4.1 A framework for integration management
As Yin (1994) points out, it is crucial to develop a theory and hypotheses or propositions before carrying out the case study data collection. This section uses academic literature and studies from well-known management consulting firms to build a theoretical framework that incites the development of the working propositions in section 4.2. More importantly, it generates a better understanding of the critical tasks required to achieve successful post- acquisition integration, which also guided the data collection through interviews for this paper. Figure 1 depicts this Framework for Integration Management and divides the integration into two steps. First, the overall post-acquisition integration strategy should be determined. This includes highly important decision-making regarding the integration vision and roadmap, integration pace, and picking the integration team leader. Second, successful integration tackles two processes parallel: task integration and human integration. Birkinshaw et al. (2000) argue that these two processes are distinctive but still somewhat interrelated: Human integration facilitates successful task integration and vice versa.
illustration not visible in this excerpt
Figure 1. Framework for Integration Management
Source. Author; adapted from Ashkenas & Francis (2000); Birkinshaw et al. (2000); Chandra, Hagen, Miller, Thakkar, & Thakur (2010); Pautler (2003); Rothenbuecher, Schrottke, Niewiem, & Wiche (2008); Rouse & Frame (2009).
Task integration focuses on value creation and thus transfers of capabilities and resource sharing, which leads to operational synergies. This includes the decision, which business functions to integrate, usually resulting in overhead reduction. Rothenbuecher et al. (2008) at the management consulting firm A.T. Kearney advise to consolidate operational and administrative functions but leave sales and marketing alone. Selecting a strategy on how to proceed with differences in existing processes like reporting, inventory control, or production planning is also part of task integration. Chandra et al. (2010) suggests five approaches to process integration, all being fairly self-explanatory: loosely coupled, select one, best of breed, replace all, or outsource. For successful task integration it is also critical to ensure an uninterrupted customer experience during the entire process.
In contrast to the value focus of task integration, human integration centers on generating satisfaction and shared identity among employees of both the acquiring and the acquired company. According to Birkinshaw et al. (2000), the human integration process is slow and difficult to master effectively. It comprises sociocultural integration, solving power and people issues, and retaining key talent.
The above Framework for Integration Management helps to identify the crucial steps for an acquisition to be successful in the long term and is thus a valuable contribution to managerial practice on its own (see section 3: research question 1.a.). Relating to Yin’s (1994) suggestion to develop theory ex-ante of the data collection, it acted as a guideline in helping to formulate appropriate interview questions for the case study interviews and address research question 1.b., 2.a., 2.b., and 2.c. (see section 3). Moreover, the framework provides the base and structure for a number of working propositions, which are presented in the following section.
4.2 Working propositions
Yin (1994) and Eisenhardt (1989) differ in their approach towards research design concerning the use of propositions ex-ante of the case study. The first vehemently argues that “each proposition directs attention to something that should be examined within the scope of the study” and is thus valuable to frame beforehand (Yin, 1994: 21). The latter states “preordained theoretical perspectives or propositions may cause bias and limit the findings” (Eisenhardt, 1989: 536). Concurring with Yin (1994), this section introduces a number of working propositions that the empirical case studies aim to test and/or refine and extend.
Private equity firms exist for the purpose of creating returns on investment with their funds, which they ultimately pay out to their Limited Partners (LP) minus fees for the General Partners (GP) and expenses (Fraser-Sampson, 2007; Kaplan & Schoar, 2005). Due to this structure and focus, PE firms pursuing buy and build strategies in buyouts are incentivized to look for ways to increase the returns on their investment, i.e. increase the exit value. Connecting this paradigm with the research on post-acquisition integration leads to Proposition 1.
Proposition 1: PE firms pursuing buy and build strategies are only committed to post-acquisition integration when it is expected to increase the exit value.
Rouse and Frame (2009) of the strategy consulting firm Bain & Company establish ten steps to successful M&A integration which are reflected in Figure 1. They argue that early planning of the integration process is fundamentally important for a positive outcome— ideally starting pre-acquisition. PE firms direct the target selection process pre-acquisition as part of their portfolio management and do so with expectations concerning specific synergies achievable through integration. As Acharya et al. (2009) explain, many PE firms craft a “100- day plan”, which lays out the strategic and operational agenda for the portfolio company or add-on acquisition. It is likely that these plans include details on the integration process in order to pave the way for the expected synergies.
Proposition 2: PE firms contribute by facilitating or taking over the planning of the integration process pre-acquisition.
The notion underlying Proposition 1 has further implications for hypothesizing the results of this paper. From an RBV perspective, an overlap of pre-existing resources between the acquirer and the acquired company should lead to an integration process resulting in dismissal or replacement of the ‘weaker’ set of resources that does not fulfill the VRIN (valuable, rare, inimitable, non-substitutable) criteria (Barney, 1991). In more practical terms, integration can lead to synergies if resources are overlapping and the result can even be greater than the sum of its parts. As argued by Birkinshaw et al. (2000), task integration is initiated in order to exploit these synergies and thus create value with the acquisition. They add that satisficing results can be achieved within the first years post-acquisition, which is compatible with the PE firm’s limited investment longevity of four to five years on average (Jelic, 2008; Jelic & Wright, 2011; Wright & Bruining, 2008). Furthermore, value-creating synergies should be positively reflected in the exit value.
Proposition 3: PE firms initiate task integration because it regularly leads to synergies, which in turn are expected to increase the exit value.
Figure 1 allows for the formulation of more specific propositions relating to certain steps or measures within the post-acquisition integration strategy and its connected processes. Within the process of task integration, PE firms are expected to cooperate with the management of the portfolio company and contribute their industry expertise in order to achieve anticipated synergies (Meulemann et al., 2009). The GPs oftentimes hire professionals with operating backgrounds, e.g. former CEOs of large corporations or consulting firms, and utilize their experience when it comes to making operational decisions (Kaplan & Strömberg, 2008). Hence, it can be assumed that the PE firms are able to add value to the task integration process, especially with regard to decisions reoccurring in every acquisition such as the decision which business functions (e.g. purchasing, sales, marketing) or which businesses processes (e.g. reporting, inventory control, production planning) to integrate. PE firms contribute financial and governance expertise (Acharya et al., 2009) and are thus expected to facilitate the integration of accounting and finance functions, governance mechanisms, and business processes.
Proposition 4: PE firms contribute to the integration of business functions, governance mechanisms, and the integration of business processes.
As Rouse and Frame (2009) point out, monitoring the performance closely helps ensure successful integration. Acharya et al. (2009) analyze the impact of active ownership on performance of PE deals and find that PE firms take a monitoring role: “[…] the top management team is monitored on a regular basis in terms of their performance through precise systems and processes, and plan deviations are reacted to immediately - operationally as well as through management changes - if necessary” Acharya et al. (2009: 32).
1 The acquired company’s earnings will be more highly valued when incorporated into a larger business due to the fact that large companies generally command higher than smaller multiples ones (Fraser-Sampson, 2007; Watson, 2011).
2 For the purpose of this paper, acquisition will be used as overarching term comprising any type of non-organic growth, including mergers.
3 Section 4.2 of this paper gives a comprehensive definition of the post-acquisition integration process through the Framework for Integration Management.
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- build strategies management buyouts post-acquisition integration contribution private equity firms