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
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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.
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