Stockholm School of Economics Department of Accounting Department of Finance Master Thesis Spring 2012 Do Parents Matter? Vendor Identity of Private Equity Buyouts and Improvements in Operating Performance Abstract: In this paper, we investigate the effects of different types of vendors on private equity funds’ ability to enhance the operating performance of their targets. Where previous research has focused on one type of vendor at a time, we take a cross-sectional approach, dividing our sample into five different vendor identities. We use a dataset of 218 buyouts in Scandinavia with exits between 1998 and 2010 and test for differences in EBITDA-margin, ROA and Sales CAGR compared to industry peers. We find no significant difference in abnormal operating performance across different vendor identities when using multi-group variance analysis. However, on weak statistical significance levels, individual tests indicate that buyouts from private vendors show abnormal operating performance compared to other vendors as a group; this also holds for buyouts from multidivisional companies. Moreover, we provide evidence that private equity owned firms in Scandinavia outperform industry peers over the investigated time period. Keywords: Private equity, buyouts, abnormal operating performance, vendor identity, non- parametric tests Authors: Victor Adler (21144)♦ and Robin Norberg (21407)♠ Supervisor: Assistant Professor Håkan Thorsell Discussants: Christine Ahlstrand (21179) and Katerina Hanackova (40169) Presentation: May 25, 2012, 10:00-12:00 in room 536 ♦ [email protected] ♠ [email protected] i Acknowledgements We would like to thank our tutor, Håkan Thorsell, Assistant Professor at the Department of Accounting at the Stockholm School of Economics, for valuable input and comments throughout the writing of this thesis. Furthermore, we would like to thank lecturer Håkan Lyckeborg for assistance with statistical matters. We would also like to give a special acknowledgment to Ole Falk Hansen for greatly facilitating our data collection by sharing the ambitious dataset from his and his colleagues’ MSc Thesis. Finally, we wish to thank all our friends and fellow students that took their time to read through this thesis and provide comments. Stockholm, May 2012 Victor Adler Robin Norberg ii Contents I Introduction ......................................................................................................................................... 1 Background ............................................................................................................................................... 1 Purpose ...................................................................................................................................................... 2 Delimitations & definitions .................................................................................................................... 3 Outline ....................................................................................................................................................... 5 II Theoretical and Empirical Foundation ............................................................................................. 6 Value creation in private equity buyouts ............................................................................................... 6 Owner identity and room for improvements ....................................................................................... 9 Vendor identity in buyouts ................................................................................................................... 11 Contribution ............................................................................................................................................ 14 III Hypotheses .......................................................................................................................................... 16 IV Method ................................................................................................................................................ 20 Measuring operating performance ....................................................................................................... 20 Assigning peer groups ........................................................................................................................... 24 Testing robustness ................................................................................................................................. 26 Model specification ................................................................................................................................ 28 V Data ...................................................................................................................................................... 31 Buyout sample and selection criteria ................................................................................................... 31 Sample distribution ................................................................................................................................ 32 VI Empirical Results and Discussion ................................................................................................... 37 Improvements in operating performance ........................................................................................... 37 Vendor identity and operating performance ...................................................................................... 38 Implications ............................................................................................................................................. 44 VII Conclusion .......................................................................................................................................... 48 IIX References ........................................................................................................................................... 49 IX Appendix ............................................................................................................................................. 54 Appendix A – definition of ratios ........................................................................................................ 54 Appendix B – exchange rates ............................................................................................................... 55 Appendix C – definition of statistical methods employed ............................................................... 55 Appendix D – holding period of buyouts .......................................................................................... 58 Appendix E – supplementary tables and figures ............................................................................... 58 Appendix F – sample firms and peer groups ..................................................................................... 61 iii List of tables Table 2.1 - Selection of studies on value creation in private equity buyouts ....................................................... 9 Table 2.2 - Overview of governance mechanisms in different ownership structures ................................... 11 Table 2.3 - Studies on vendor characteristics and post-buyout value creation ............................................... 14 Table 5.1 - Distribution of sample by country and vendor identity ................................................................. 34 Table 5.2 - Distribution of sample by industry ....................................................................................................... 34 Table 5.3 - Summary statistics for firm characteristics by vendor identity at entry year ................................. 36 Table 6.1 - Summary statistics for operating performance, unadjusted and adjusted ...................................... 37 Table 6.2 - Changes in operating performance for sample, peer groups and difference in medians ............ 38 Table 6.3 - Adjusted changes in operating performance measures grouped by vendor identity .................... 39 Table 6.4 - Ranks and test statistics using the Kruskal-Wallis test .................................................................... 40 Table 6.5 - Mann-Whitney U test comparing groups in relation to the remaining sample population......... 42 Table 6.6 - Summary of hypotheses and results ................................................................................................... 43 Table d.1 - Holding periods of buyouts in sample ................................................................................................ 58 Table e.1 - Unadjusted changes in operating performance, measures, grouped by vendor identity .............. 58 Table e.2 - Adjusted changes in operating performance measures, grouped by vendor identity ................... 59 Table e.3 - Peer group changes in operating performance measures, grouped by vendor identity ............... 60 Table f.1 - Sample of buyouts ................................................................................................................................... 61 List of figures Figure 3.1 – Summary of (r) hypotheses ............................................................................................................... 19 Figure 3.2 – Summary of (d) hypotheses ................................................................................................................. 19 Figure 4.1 – Event window definition