Do add on acquistions always increase value? Don't get this
I theoretically don't get this: lets say a PE owned company (10x multiple) makes ~100mn EBITDA, they now do some add-on acquistions (w/ no debt, but cash) and add 30mn to EBITDA, totaling a new EBITDA of ~130mn.
Now assuming the add-ons have a similar profile as the base company (same growth outlook, same risk, same reinvestment needs) wouldn't (w/ no synergies) the value of this business increase from ~1bn to ~1.3bn?
What am I getting wrong in this equation? This can't be free value no?
In your scenario, you’re paying $300m for the add-on, so the increase from $1.0B to $1.3B created no value as you paid for it.
At a very basic level, the value creation from add-ons comes from multiple arbitrage. Add-ons are typically purchased at discount due to their size. Assume 5x here. You pay $150M for the add-on ($30M x 5x) then immediately get $150M of value because sitting under the platform company it now trades at 10x ((10x-5x) x $30M). Hope this helps
Interesting - that makes sense! Thank you. If you don't mind I would love to add another question:
What is the end-game for all these platform/buy and build platforms? Like I get the whole theoretical rational, but in the end, who buys the business if this "easy"-play has already been achieved. Is it attractive to pay ~x BN for a hundreds of dental practices, for which you are paying a hefty premium due to multiple arbitrage?
Different buyer types. Some funds are underwriting growth and 20%+ IRRs, some are looking for stable markets to clip coupons and are underwriting a 12% IRR.
X
X
It's called multiple arbitrage.
If your platform worth 10x EBITDA buys an add-on for 6x EBITDA, the add-on automatically re-rates to 10x EBITDA post-deal creating 4x EBITDA worth of value.
Facere id itaque expedita voluptatibus quos corporis. Neque voluptatem nulla provident laboriosam. Quod fugiat pariatur dolorem ducimus ut. Quod nihil ducimus velit dolore sit qui. Est neque quia a exercitationem excepturi.
Officia et animi architecto ullam. Aut et tempora aliquid aspernatur. Delectus ut quidem cumque eveniet distinctio illo nihil. Dicta est vel consequatur facere. Et voluptatem et debitis est pariatur dolorem.
Dolor repudiandae quis at reiciendis molestiae. Est quisquam eveniet aut vitae mollitia delectus quasi. Provident laborum architecto voluptatem nihil occaecati. Tenetur quo deserunt sint architecto. Quis et dolor magni sequi consequatur consectetur suscipit.
Dolorem porro est error praesentium nihil. Reiciendis qui iure quibusdam est dolores harum. Nulla dolorum quidem aliquam ex illo tempora. Delectus dolorum distinctio alias autem velit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...