International Private Equity Syndicates and Performance of Portfolio Firms

International Private Equity Syndicates and

Performance of Portfolio Firms

Author: Djoeke van Dijk

S1908278

Master Thesis

MSc International Business & Management

April 2012

University of Groningen

ACKNOWLEDGEMENT

This thesis has been the final step in the completion of my studies International Business and Management at the University of Groningen. It has been a great and informative experience to combine the conduction of this research, with an internship at Friesland Bank 'Structured Finance'.

Therefore I would like to thank my colleagues of Friesland Bank for giving me this

opportunity. I thank my company supervisor Mr. Maarten Boven in particular for his support during my study. I would also like to thank my university supervisor Mr. Igor Kalinic for his feedback on my thesis.

ABSTRACT

This study attempts to find out what implications international Private Equity syndicates have for portfolio firm performance by means of a sample of 212 acquisitions. This research also deals with specific factors which comprise the number of PE-investors involved as well as the level of country- and cultural diversity within the syndicate and the level of internationalization of the portfolio firm. It builds upon and confronts contradicting studies concerning IJV failure - associated with the downside-potential of culture clashes and information asymmetries - on the one hand, and board nationality diversity success - associated with the upside potential of knowledge transfer of foreign markets - on the other hand. Although knowledge transfer management studies predict that culture clashes and information asymmetries hamper the transfer of knowledge regards foreign markets and in turn portfolio firm performance, this research shows that this is not necessarily the case when speaking of international Private Equity syndicate driven acquisitions. More specifically, I find that the number of investors in the international Private Equity syndicate is positively related to the change in pre-post acquisition performance. Besides this, I find significant evidence to conclude that the pre-post acquisition performance changes more positively when a portfolio firm is taken over by an international Private Equity syndicate involving investors from three or more, rather than only two different countries. Nevertheless, I cannot conclude that there is a positive linear relationship between the level of country diversity within the international Private Equity syndicate and the pre-post acquisition change in performance.

TABLE OF CONTENTS

3 SAMPLE AND METHODS 19

4 RESULTS 22

5 DISCUSSION 27

6 CONCLUSION 31

REFERENCES 34

APPENDIX I - VARIETIES OF CAPITALISM 38

1 INTRODUCTION

'Two heads are better than one'

This phrase was first recorded by John Heywood's work on proverbs in 1546 and is still commonly used in daily speech today1. But does this phrase also apply to international Private Equity syndicates? More specifically, are two (or more) Private Equity firms from different countries better than one when speaking of the performance of the portfolio firm? That is the issue that I will deal with in my thesis.

Private Equity: a definition.

Private Equity driven acquisitions have been popular since the 1980s (Klier, Welge and Harrigan, 2009; Lewis, 2006; Meuleman and Wright, 2007 2011; Officer, Ozbas and Sensoy, 2010). The term Private Equity (PE) refers to highly leveraged acquisitions conducted by specialist PE-investors who raise the necessary equity from institutional investors such as pension funds and college endowments as well as wealthy individuals (Bailey, 2007; Heed, 2010). As PE-investors try to minimize the amount of equity invested, they seek to raise as much debt as possible (bank loans and/or bonds) in order to maximize their return on investment. The goal of a PE-investor is to profit from an acquisition through an exit strategy, i.e. by fixing up the target and selling it after several years against a high profit (Bailey, 2007).

Research gap 1: lack of knowledge about international PE-syndicates in general.

Within the PE-driven acquisition market, multiple PE-investors who take an equity stake in a portfolio firm for a join pay-off, i.e. PE-syndicate driven deals, are a relatively new phenomenon. Officer et al. (2010) found that 37 out of their sample of 70 PE-syndicate driven deals between 1984 and 2007 took place between 2005 and 2007. The actuality of this topic is also recognized by Lewis (2006) who states that such mega-deals conducted by PE-syndicates were one of the most notable trends of 2005. At the same time, PE-syndicates have become more internationally diversified, which is not surprising given the large scale globalization in the investment business (Meuleman and Wright, 2007, 2011). Meuleman and Wright (2007) find for instance, that between 1990 and 2006, as much as 50% of the UK PE-investors investing into continental Europe teamed up with local partners. An example of such a deal is

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the take-over of the Swedish Q-matic Holding AB in 2004 by the 3i Group Plc (UK) and Litorina Kapital Management AB (Sweden). Despite the relevance and actuality of this topic, PE-syndicates, and especially international PE-syndicates, are largely neglected in current literature (Klier et al., 2009; Lewis, 2006; Meuleman and Wright, 2007, 2011; Officer et al., 2010).

Research gap 2: lack of knowledge about the ‘ideal’ PE-syndicate composition.

PE-investors join a PE-syndicate because syndicates may have access to better financing terms, reduce opportunity cost and spread risk (Schwartzman, 2006). Fleck, Lombers, Robertson and Brown (2005) argue that members may also see the syndicate as a means to enter a new sector, using the management skills and know-how of another member. When speaking of international syndicates in particular, the primary motivation for local PE-investors to team up with foreign PE-PE-investors is to gain access to and experience in foreign markets (Meuleman and Wright, 2011). Hence, each partner in the syndicate will bring in different qualities, debt, equity, reputation, know-how and management and control. For this reason it is not surprising that these authors all agree that picking the right team is paramount to the PE-syndicate's success (Fleck et al. 2005; Meuleman and Wright, 2011; Schwartzman, 2006). However, while they all stress the importance of PE-syndicate composition, they failed to find out what composes the ‘ideal’ PE-syndicate that leads the firm to the best possible performance.

Objective of this research.

This research combines both research gaps described above, as it treats country diversity as a key feature of PE-syndicate composition by investigating international PE-syndicates in relation to portfolio firm performance. More specifically, I investigate the effect of international PE-syndicates on the performance of portfolio firms taking into consideration a number of moderating factors comprising (1) the number of PE-investors involved in the syndicate, (2) the level of country diversity and (3) cultural diversity within the syndicate and (4) the level of internationalization of the portfolio firm. This allows me to understand whether it is wise for a PE-investor to team up with one or more foreign PE-investor(s) in order to facilitate an acquisition and under which specific circumstances such a deal is most beneficial. Hence, the main research question of this research is:

Theoretical contribution.

The contribution of my thesis is twofold as it adds to existing academic literature on the one hand and addresses a more practical problem on the other hand. The theoretical contribution is as follows: Firstly, this research contributes to a better understanding of international PE-syndicates. More specifically, it addresses two relevant research gaps: (1) the lack of knowledge about international PE-syndicates in general and (2) the lack of knowledge about the ‘ideal’ composition of PE-syndicates. As explained, this study attempts to combine both research gaps into one study. Secondly, this research adds to the international business literature as a whole, as it builds upon and connects between the contradicting studies from the International Joint Venture (IJV) and board nationality diversity fields of research and attempts to provide clarity about these studies with regard to international PE-syndicates. In fact, the conceptual model and the hypotheses regarding the implications of international PE-syndicates for portfolio firm performance are based on theories from the IJV and board nationality diversity literature streams.

Practical contribution.

Structure.

2 LITERATURE REVIEW

2.1 Previous Literature

PE-syndicates and their impact on deal pricing.

As Private Equity syndicate driven deals in general have become more popular throughout the years, an increasing number of studies focus on this phenomenon. Most of these studies address deal pricing rather than post-acquisition performance implications (Bailey, 2007; Boone and Mulherin, 2009; Officer et al., 2010). Such deal pricing studies are based on the assumption that club deals, i.e. PE-syndicate driven deals, reduce the number of parties available to submit a bid in order to acquire a firm. Consequently, they predict that fewer bidders on the auction will result in lower prices paid for the target firms (Bailey, 2007). Officer et al. (2010) confirm this proposition as they find that shareholders of publicly traded firms receive considerably lower premiums when it becomes the target of a PE-syndicate, rather than a sole PE-investor. Boone and Mulherin (2009) however, studied club deal pricing in the period 2003-2007, but could not find evidence for a club deal discount.

Determinants of international PE-syndicates.

International Venture Capital performance.

Despite the relevance of international PE-syndicates, Meuleman and Wright (2011) are one of the few to deliver a valuable contribution to this interesting area of research. However, research from the early stage Venture Capital (VC)2 context presents more overlap with my study. Li, Li, Vertinsky and Zhang (2010) for instance, relate international VC-syndicates to portfolio firm performance as they investigate “how cross national institutional differences affect the performance of international syndicates of venture capitalists”. They found that institutional differences such as differences in perception, communication, standard operating procedures and contingency response patterns increase transaction costs and conflicts, and reduce the effectiveness of collaboration within the syndicate. However, Li et al. (2010) also conclude that some national differences present opportunities with respect to the exploitation of synergies and complementarities. In conclusion, Li et al. (2010) highlight both the upside and downside potential of international VC syndicates, but could not give a definite answer to the question of whether a PE-investor should or should not team up with foreign PE-investors in a syndicate when looking at its implications for portfolio firm performance.

2.2 Theoretical Framework

International PE-syndicates in relation to IJVs and board nationality diversity.

As discussed in the previous section there exists a great lack of prior research in PE literature examining the performance implications of international PE-syndicates. Therefore, the theoretical framework is mainly build around two important, but contradicting literature streams. More specifically it is based on theories from the IJV and board nationality diversity fields of research. Studies concerning IJV deals are found to be applicable to international PE-syndicated deals, because both deals involve two or more partners having an equity stake in the underlying portfolio firm (Meuleman and Wright, 2007). However, Heed (2010)

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emphasizes that the most important distinction between Private Equity as opposed to ‘normal’ M&A / Joint Venture activity is the involvement of high amounts of debt and specialized management services. The presence of specialized management services in PE-driven acquisitions implies that a PE-investors is not just a shareholder but is actively involved in the strategic and operational decision making of the portfolio firm. As the obvious purpose of a board is to perform management services, studies concerning board nationality diversity might as well be applicable to international PE-syndicates.

International Joint Ventures and firm performance.

Many scholars have examined the success of International Joint Ventures and found that they often lead to dissolution or partner dissatisfaction (a.o. Gooderham and Nordhaug, 2003: 18; Lowen and Pope, 2008; Lung-Tan, 2006). These studies are build around the fact that it is more difficult to maintain a relationship when the parent firms are from different cultures. More specifically, the problem with International Joint Ventures lays in the diverging objectives and expectations of the parent firms (Gooderham and Nordhaug, 2003). Lung-Tan (2006) adds to this that cultural distance between parent firms has a negative effect on the co-operative strategy and in turn on the success of IJVs as its management must try to cope with the different paternalistic orientations, communication patterns, decision-making processes, supervision styles and control mechanisms of the two parents. Therefore, it is not surprising that IJVs face extremely high failure rates (above 50%) (Gooderham and Nordhaug, 2003: 18; Lowen and Pope, 2008). Since international PE-syndicates are likely to face the same cooperation difficulties as a result of such culture clashes and information asymmetries, studies regarding IJV failure predict that international PE-syndicates have a negative influence on portfolio firm performance. This downside potential of international PE-syndicates is clarified in figure 1.

Figure 1: Downside-Potential of international PE-syndicates

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Board nationality diversity and firm performance.

Unlike IJV studies, studies concerning board nationality diversity predict that international PE-syndicates have a positive influence on portfolio firm performance. Van Veen and Marsman (2008) found that nationality diversity in management boards has a positive impact on firm performance due to the intricate knowledge of managers of markets abroad. Such studies are based on the logic that the international backgrounds of board members have a significant impact on corporate decision-making with regard to foreign expansion, which in turn brings in benefits for firm performance (Nielsen and Nielsen, 2008). Hence, a high level of board nationality diversity is important for the quality of strategic decision making, “so increased diversity leads to better company performance.” (Van Veen and Marsman, 2008). In addition to a firm’s managements board, a PE-syndicate is also highly involved in a firm’s decision making. Therefore, I expect that international PE-syndicates are just as much as internationally diversified management boards able to exploit the intricate knowledge of foreign markets and in turn influence firm performance positively. Hence, studies regarding board nationality diversity success predict the upside potential of international PE-syndicates, which is presented in figure 2.

Figure 2:Upside-potential of international PE-syndicates

Knowledge transfer management.

In conclusion, studies from the IJV and board nationality diversity field of research, point in two different directions when using it to predict the effect of international PE-syndicates on portfolio firm performance. I.e. there is an upside potential as well as downside potential. Therefore, I consult literature from the knowledge transfer management stream of research in order to shed some light on these opposing predictions. Studies examining knowledge management imply that culture clashes and information asymmetries are negatively associated with the transfer of knowledge (Ambos and Ambos, 2009; Chini and Ambos, 2005; Simonin, 1999). Chini and Ambos (2005) state for example that “organizational capabilities are vital to increase knowledge transfer effectiveness and that coordination capabilities are moderated by cultural distance.” Simonin (1999) agrees by suggesting that cultural distance is a serious obstacle for communication and in turn knowledge transfer effectiveness, because of

problems like culture clashes and information asymmetries. Hence, when reflecting these findings on my research, I predict that culture clashes and information asymmetries have a negative influence on knowledge transfer regards foreign markets. This negative relationship is shown figure 3.

Figure 3: Negative impact of culture clashes and information asymmetries on knowledge transfer

Conceptual model.

The conceptual model in figure 4 combines the three literature streams concerning IJV failure, board nationality diversity success and knowledge transfer management all together. On the one hand research concerning IJVs suggests that international PE-syndicates are associated with culture clashes and information asymmetries, which have a negative effect on portfolio firm performance (the downside potential in figure 1). On the other hand board nationality diversity studies imply that international PE-syndicates are associated with the transfer of intricate knowledge regards foreign markets, which has a positive effect on portfolio firm performance (the upside potential in figure 2). In an attempt to provide some clarity on these contradicting studies in relation to international PE-syndication, I applied studies from the knowledge transfer management literature, which predict a negative relation between culture clashes and information asymmetries on the one hand and knowledge transfer regards foreign markets on the other (figure 3). Taking everything together in figure 4, I propose that international PE-syndicates have a negative effect on portfolio firm performance, simply because culture clashes and information asymmetries hamper the knowledge transfer regards foreign markets and will therefore limit the upside potential. Therefore, the downside potential of international PE-syndicates (bold in the conceptual model in figure 4) is leading for the hypotheses development.

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Figure 4: Conceptual model

2.3 Hypothesis Development

H1 - The main hypothesis.

As discussed previously, studies concerning knowledge transfer management imply that culture clashes and information asymmetries have a negative impact on the effectiveness of knowledge transfer (Ambos and Ambos, 2009; Chini and Ambos, 2005; Simonin, 1999). Simonin (1999) states for instance that "cultural distance or asymmetry not only creates difficulties for identifying market opportunities and figuring out market mechanisms, it also raises barriers for communicating with partners and for understanding the nature of their competitive advantage". Hence, it is likely that the problems of culture clashes and information asymmetries within international PE-syndicates might not allow for the portfolio firm to benefit from the intricate knowledge of markets abroad that its acquirers may possess. Therefore, I predict that the negative influence of culture clashes and information asymmetries on knowledge transfer management hampers the positive influence that knowledge transfer regards foreign markets could have on portfolio firm performance. This leads to the main hypothesis:

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Hence, it is expected that the post-acquisition performance will be lower than the pre-acquisition performance. There may be some circumstances which may have an effect on this 'change in pre-post acquisition performance'. I.e. there may be some moderating factors which may have an effect on this proposed negative effect of international PE-syndicates on portfolio firm performance. I distinguish three syndicate specific factors: number of parties involved in the syndicate and country- and cultural diversity within the syndicate. In addition, I deal with one portfolio firm specific factor which concerns the level of internationalization of the portfolio firm. Figure 5 introduces these four moderating factors treated in hypotheses 2 through 5 in relation to the main hypothesis (H1).

Figure 5: Moderating factors

H2 - Number of parties involved in international PE-syndicates.

The first moderating factor which is treated in hypothesis 2 is the number of parties involved in the international PE-syndicate. This hypothesis is based on the logical proposition that the diversity and complexity in the syndicate is likely to increase with the number of parties involved. For example, a higher number of parties involved in the international PE-syndicate reflect a higher complexity on issues such as experience, partner protectiveness and organisational distance (Simonin, 1999). In turn, increased complexity and diversity will increase information asymmetries (Kirby and Harter, 2003). For this reason, I expect that knowledge sharing becomes more complicated as information asymmetries are more common when there is a higher number of parties involved in the international PE-syndicate.

Hence, I propose that in an international PE-syndicate consisting of three or more investors, information asymmetries are likely to be more common, because of the increased diversity and complexity. Subsequently, I predict that in an international PE-syndicate consisting of only two different parties (from only two different countries), problems concerning information asymmetries are likely to be kept to a minimum, which leaves more opportunities to exploit the positive effect of knowledge transfer regards foreign markets. In turn, I expect that portfolio firms will make more progression when they are taken over by an international PE-syndicate involving only two investors rather than three or more investors. This leads to hypothesis 2a:

H2a The change in pre-post acquisition performance is more positive when the portfolio firm is taken over by an international PE-syndicate involving only two, rather than three or more investors.

This line of reasoning can be translated into a second hypothesis, which predicts a possible negative linear relationship between the number of parties involved in the international PE-syndicate on the one hand and the change in pre-post acquisition performance on the other hand. This proposition leads to hypothesis 2b:

H2b The lower the number of parties involved in the international PE-syndicate, the more positive the change in pre-post acquisition performance will be.

H3 - Country diversity within international PE-syndicates.

Many PE-syndicated driven acquisitions involve investors from only two different countries, while other syndicates consist of investors from three or even more different countries. Hypothesis 3 considers this country diversity issue. Hofstede (1991: 5) defines culture as "the collective programming of the human mind that distinguishes the members of one human group from those of another." and states that "cultural influences on management are most clearly recognizable at the national level." Since cultural diversity and therefore country diversity may lead to culture clashes (Ambos and Ambos, 2009; Chini and Ambos, 2005), it can be reasoned that cultural clashes become more common when there is a higher number of countries of origin involved in the international PE-syndicate.

clashes, which leaves more opportunities to exploit the positive effect of knowledge transfer regards foreign markets. In turn, I expect that portfolio firms will make more progression when they are taken over by an international PE-syndicate involving investors from only two different countries rather than investors from three or more different countries. This relation is translated into hypothesis 3a:

H3a The change in pre-post acquisition performance is more positive when the portfolio firm is taken over by an international PE-syndicate involving investors from only two, rather than three or more, different countries.

This line of reasoning can also be translated into a second hypothesis, which predicts a possible negative linear relation between the country diversity within the international PE-syndicate on the one hand and the change in pre-post acquisition performance on the other hand. This proposition leads to hypothesis 3b:

H3b The lower the country diversity within the international PE-syndicate, the more positive the change in pre-post acquisition performance will be.

H4 - Cultural diversity within international PE-syndicates.

H4 The change in pre-post acquisition performance is more positive when the portfolio firm is taken over by an international PE-syndicate involving investors from the same capitalist economy, rather than investors from different capitalist economies.

H5 - Level of internationalization of the portfolio firm.

Unlike hypotheses 2 through 4 which treat the PE-syndicate specific factors, hypothesis 5 deals with a portfolio firm specific factor: the level of internationalization of the portfolio firm. When looking at the board nationality diversity context once more, Nielsen and Nielsen (2008) find that "Top executives’ and board members’ foreign nationality and international work experience are two important yet distinct sources of individual competence and ability to deal with the complexity of international operations of multinational corporations". Based on this finding, I assume that internationally operating portfolio firms know better how to deal with the complexity of international PE-syndicates than domestically operating portfolio firms, simply because of the experience they have gained in the international field. Therefore, I expect that internationally operating portfolio firms will be better able to prevent culture clashes and information asymmetries from hampering knowledge transfer regards foreign markets. The presence of foreign subsidiaries is used to make a distinction between domestically and internationally active portfolio firms. Hence, I predict that internationally active portfolio firms (i.e. firms with subsidiaries abroad) will make more progression than domestic firms (i.e. firms without subsidiaries abroad) when they are taken over by an international PE-syndicate. This leads to hypothesis 5:

3 SAMPLE AND METHODS

Sample.

The five hypotheses presented in the previous section are quantitatively tested on the basis of a sample of 212 acquisitions performed by international PE-syndicates. The data originates from the ‘Zephyr’ merger and acquisition database which is administered by Bureau van Dijk. Bureau van Dijk provides versatile company information and business intelligence covering more than 100 million companies around the world. I extracted all PE-driven acquisitions completed in the 6-year period between 2003 and 2008, in which multiple PE-investors were involved, and eliminated the domestic syndicated deals to remain with international PE-syndicated deals only. To certify that the international PE-syndicates left in the sample are able to assert significant control over the portfolio firm in order to be able to influence portfolio firm performance in the first place, I have left out the deals in which the syndicate acquired a minority stake (<50%). In order to acquire the necessary performance data, I matched the sample generated in Zephyr to the financial database ‘Orbis’, which is also administered by Bureau van Dijk. This procedure resulted in a sample of 212 data points, which is comparable to other studies about PE-syndicate driven acquisitions (Meuleman, Amess, Wright and Scholes, 2009; Officer et al., 2010)

SPSS testing.

This research concerns a comparative study, since its concrete goal is to find out whether the pre- and post acquisition performance of the portfolio firms is significantly different from each other (H1) and what factors have an influence on this change in pre-post acquisition performance (H2 through H5). Therefore, these hypotheses are tested into SPSS by means of a (one-tailed) t-tests. These t-tests are one-tailed because a prediction is made with regard to the direction that the outcome is expected to point to. Hypotheses 2 and 3 are also tested by means of a regression analysis.

portfolio firm performance, as treated by hypothesis 1. Unlike hypothesis 1, which is based on ‘before-and-after’ pairs, the moderating factors treated in hypotheses 2a, 3a, 4 and 5 are divided into a panel 1 and 2. Hence, I compare panel 1 and 2 of each hypotheses in order to find out whether their mean change in pre-post acquisition performance is significantly different from each other. Figure 6 presents the factors and accommodating panels that belong to hypotheses 2a, 3a, 4 and 5.

Figure 6: factors and accommodating panels

Factor Panel 1 Panel 2

H2a

Number of PE-investors involved in the multinational PE-syndicate

(a) Syndicates involving three or more PE-investors

(b) Syndicates involving only two PE-investors

H3a

Country diversity in the multinational PE-syndicate

(a) Syndicates involving PE-investors from three or more different countries

(b) Syndicates involving PE-investors from only two different countries

H4

Cultural diversity in the multinatioanl PE-syndicate*

(a) Syndicates involving PE-investors from the same capitalist economies

(b) Syndicates involving PE-investors from different capitalist economies

H5

Level of internationalization of portfolio firm

(a) PE-syndicates acquiring a firm without foreign subsdiairies

(b) PE-syndicates acquiring a firm with foreign subsidiaries

With regard to hypotheses 2 and 3, it is not only relevant to compare the mean change of performance of the two panels to each other. It would also be interesting to find out whether a lower number of investors and/or number of countries involved within the syndicate lead to a higher portfolio firm performance, i.e., whether there is a negative linear relationship between the number of investors involved in the syndicate and the level of country diversity within the syndicate on the one hand and the change in pre-post acquisition performance on the other hand. Therefore, a regression analysis is conducted for hypothesis 2b and 3b in addition to the independent samples t-test which is conducted for hypothesis 2a and 3a.

Performance measures.

For these reasons the performance measure used in this research is ROA. According to Meeks and Meeks (1981), ROA is the most appropriate accounting-based measure for analyzing M&A performance, “as it is less influenced by the possibility of upward or downward estimation bias caused by changes in leverage or bargaining power resulting from a merger.” Besides this, Bruton, Filatotchev, Chahine, Wright, 2010) find that ROA ensures that the relative asset intensity, i.e. the size of the firm, does not drive the results. For this reason it is not surprising that ROA has been used by many scholars (Bruton et al., 2010; Hitt, Harrison, Ireland and Best, 1998). Orbis financial database defines ROA (%) as follows:

profit before tax

ROA (%) = --- x 100% Total assets

I calculate the change of ROA over time (pre- and post acquisition ROA) in order to ensure that potential changes in portfolio firm performance are driven by the new owners. This will result in an absolute number. I choose a time frame of 2 years, in the first place because it has been found that the first two years of an acquisition are critical to its success, and in the second place because two years are usually sufficient for the completion of the integration process (Papadakis and Thanos, 2010).

Furthermore performance indicators are subject to market and industry effects. Hence, in order to ensure that a bad or good industry/market environment does not drive the results, I adjust ROA for industry effects by subtracting the average industry ROA from the portfolio firm's ROA, following other authors such as Hitt et al. (1998). Data regarding industry performance is gathered from the Orbis financial database as well and is classified according to the 3-digit US SIC codes. Pre- and post acquisition industry adjusted (i.a.) ROA are calculated according to the following formulas:

Pre-acquisition i.a. ROA = ROA,t-2 - ROA s,t-2 Post-acquisition i.a. ROA = ROA,t+2 - ROA s,t+2

* t+2 / t-2 represent the average ROA of the target two years after and two years before the acquisition. * s,t+2 / s,t-2 represent the average industry ROA two years after and two years before the acquisition.

This pre- and post i.a. ROA are compared to each other in hypothesis 1 by means of a paired samples t-test. In order to do be able to do the independent samples t-test and regression analyses for hypothesis 2 through 5, I transformed the variables pre- and post-acquisition i.a. ROA into one variable: change in i.a. ROA. This formula is as follows:

Change in i.a. ROA = (post-acquisition i.a. ROA - pre-acquisition i.a. ROA)

4 RESULTS

Hypothesis 1.

A one-tailed paired samples t-test was conducted to evaluate whether international PE-syndicate driven acquisitions indeed have a negative effect on the performance of portfolio firms (H1). There was a statistically non-significant increase between pre-acquisition performance (M = 18.28, SD = 30.05, SE = 2.06) and postacquisition performance (M = -16.21, SD = 29.56, SE 2.03), t(211) = 1.11, p = .135 (one-tailed). Although the test result is not significant (p = .135, one-tailed) the increase in means (+2.07) suggests that it is more likely that portfolio firms perform higher after a takeover by an international PE-syndicate than before. This is in contrast with H1, which predicts that the pre-acquisition performance would be higher than the post-acquisition performance.

Figure 7: Paired samples t-test results H1

Mean

i.a. ROA N SD

Std. Error

Mean t p

POST-acquisition i.a. ROA -16.2143 212 29.55871 2.03010

PRE-acquisition i.a. ROA -18.2826 212 30.04694 2.06363

Change 2.0683 1.111 .135*

* p < 0.05 (one-tailed)

Hypothesis 2.

Hypothesis 2a

Figure 8: Independent samples t-test results H2a Groups Mean change in i.a. ROA N SD Std. Error Mean t df p

Three or more PE investors Involved

5.5005 137 23.83300 2.03619

Only two PE-investors involved

-4.0232 73 27.78008 3.25141

Difference 9.5237 2.601 208 .005*

* p < 0.05 (one-tailed)

Hypothesis 2b

A regression analysis was used to test hypothesis 2b, i.e. to test whether there is a negative linear relationship between the no. of parties involved in the international PE-syndicate and the change in pre-post acquisition performance (i.e. change in i.a. ROA). The outcomes of this analysis confirm the results of hypothesis 2a. It shows significant evidence to be able to conclude that the higher the number of investors involved in the syndicate, the more positive the change in i.a. ROA (p = .042). Hence, this outcome is also in contradiction with the associated hypothesis. The value of R2 is .020 which means that the number of members in a syndicate can only account for 2% of the variation in change in i.a. ROA. Therefore, there must be other variables that have an influence as well. Therefore, I can conclude that this regression analysis results in a significant good prediction of the outcome variable, i.e. that the number of parties involved in the PE-syndicate does lead to a good degree of prediction of the pre-post acquisition change of performance. The unstandardized coefficient B shows that if the number of parties involved in a syndicate is increased by one, then the model predicts that the change in i.a. ROA is 1.559 points higher.

Figure 9: Regression analysis results H2b

Variable R2 B β t p

No. Of PE investors involved in syndicate

.020 1.559 .140 2.047 .042*

Hypothesis 3.

Hypothesis 3a

A one-tailed independent samples t-test was conducted to test hypothesis 3a, i.e. to test whether portfolio firms acquired by international PE-syndicates involving investors from only two different countries show a more positive change in pre-post acquisition performance (i.e. change in i.a. ROA) than portfolio firms acquired by international PE-syndicates involving investors from three or more different countries. The results of the independent samples t-test show that the mean change in i.a. ROA is significantly more positive (+6.98) when the portfolio firm is taken over by a international PE-syndicate involving investors from three or more different countries (M = 7.54, SD 25.93, SE 3.70) than when a portfolio firm is taken over by an international PE-syndicate involving investors from only two different countries (M = .56, SD 25.38, SE = 2.00; t (208) = 1.68, p = .0475 one-tailed). Like the outcomes of hypothesis 2, the results of hypothesis 3a show significant results but point into the exact opposite direction as expected.

Figure 10: Independent samples t-test results H3a

Groups Mean change in i.a. ROA N SD Std. Error Mean t df p

PE-investors from three or more different countries

7.5394 49 25.92803 3.70400

PE-investors from only two different countries

.5618 161 25.37670 1.99996

Difference 6.9776 1.677 208 .0475*

* p < 0.05 (one-tailed)

Hypothesis 3b

variable country diversity within the PE-syndicate does not lead to a good degree of prediction of change in i.a. ROA.

Figure 11: Regression analysis results H3b

Variable R2 B β t p

No. Of PE investors involved in syndicate

.016 5.351 .126 1.843 .067*

* p < 0.05

Hypothesis 4.

A one-tailed independent samples t-test was conducted to test hypothesis 4, i.e. to test whether portfolio firms acquired by international PE-syndicates involving investors from the same capitalist economies show a more positive change in pre-post acquisition performance (i.e. change in i.a. ROA) than portfolio firms acquired by international PE-syndicates involving investors from different capitalist economies. As opposed to this prediction, the test result indicates that the i.a. change in ROA is lower (-5.54) when a portfolio firm is acquired by an international PE-syndicate involving investors from the same capitalist economy (M = .05, SD = 25.10, SE 3.00) than when a portfolio firm is acquired by an international PE-syndicate involving investors from different capitalist economies (M = 5.59, SD = 28.96, SE = 2.90). However, this test does not give significant results (t (168) = -1.29, p = .10 one-tailed).

Figure 12: Independent samples t-test results H4

Groups Mean change in i.a. ROA N SD Std. Error Mean t df p

PE-investors from the same capitalist economy

.0507 70 25.10187 3.00025

PE-investors from different capitalist economies

5.5867 100 28.96452 2.89645

Difference -5.5360 -1.294 168 .10*

Hypothesis 5.

Finally a one-tailed independent samples t-test was conducted to test hypothesis 5, i.e. to compare the impact of international PE-syndicated acquisitions on the i.a. change in ROA of portfolio firms with and portfolio firms without foreign subsidiaries. The results show that there was no significant difference in i.a. change in ROA of portfolio firms with foreign subsidiaries (M = 3.87, SD = 28.01, SE = 3.19) and portfolio firms without foreign subsidiaries (M = 1.99, SD = 22.35, SE = 3.10; t(127) = -.404, p = .3435 one-tailed). Although the results are not significant and the mean difference is small (-1.88), the means of both panels suggests in accordance with the hypothesis, that portfolio firms with foreign subsidiaries are more likely to benefit from an international PE-syndicate driven acquisition than portfolio firms without foreign subsidiaries.

Figure 13: Independent samples t-test results H5

Groups

Mean change

in i.a. ROA N SD

Std. Error

Mean t df p

Portfolio firms without foreign subsidiaries

1.9911 52 22.34853 3.09918

Portfolio firms with foreign subsidiaries

3.8696 77 28.01065 3.19211

Difference -1.8785 -.404 127 .3435*

5 DISCUSSION

This study aims to find out what implications international PE-syndicates have for portfolio firm performance. Although my predictions, based on the literature review, were that international PE-syndicates have a negative effect on portfolio firm performance, results (although some significant and some non-significant) showed different outcomes. Hypotheses 2 and 3 showed significant results, while Hypotheses 1, 4 and 5 showed non-significant results.

Explaining significant results (H2 and H3).

Hypothesis 2a states that 'The change in pre-post acquisition performance is more positive when the portfolio firm is taken over by an international PE-syndicate involving only two, rather than three or more investors'. However, test results show that the change in performance (change in i.a. ROA) is significantly more positive when a portfolio firm is taken over by an international PE-syndicate involving three or more rather than only two investors. Also the outcome of the regression analysis conducted for hypothesis 2b is in accordance with the unexpected results of hypothesis 2a, as it concludes that the higher the number of investors involved in the syndicate, the higher the change in pre-post acquisition performance. Hence, the statistically significant outcomes of hypotheses 2a and 2b are the exact opposite from what I expected. The reason for this, may be the assumption that a higher number of investors in the international PE-syndicate leads to more intricate knowledge to share. Apparently the problems of culture clashes and information asymmetries are not as heavy as expected in the first place and do not withhold the portfolio firm from taking advantage of the intricate knowledge that its different investors possess.

knowledge transfer regards foreign markets. Besides, a greater country diversity can only expand the syndicate’s knowledge of foreign markets and may increase the upside potential of a takeover by an international PE-syndicate. This is in accordance with the board nationality diversity literature (rather than international joint venture literature). In contrast to the independent samples t-test which showed significant, although weak, results for hypothesis 3a, the outcomes of the regression analysis conducted for hypothesis 3b were not significant. Therefore, it may be concluded that a PE-syndicate involving investors from three or more different countries seem to be more beneficial for the change in pre-post acquisition performance than a PE-syndicate involving investors from only two different countries, but it is not correct to state that the higher the country diversity in the syndicate, the higher the change in pre-post acquisition performance.

When comparing the results of hypotheses 2 and 3 overall, It should be mentioned that these hypotheses are interrelated because an international PE-syndicate involving only two investors can never come from more than two different countries. Hence, because panel 3b (syndicates involving investors from only two different countries) comprises for a large part of data points from panel 2b (international PE-syndicates involving only two investors) Since the outcomes of hypothesis 2a were highly significant and the outcomes of hypothesis 3a were significant, but weak, it is possible that the results of hypothesis 3a were influenced by hypothesis 2a. I.e. because of overlapping data points, hypothesis 3a may have turned out to be significant, only because hypothesis 2b is. The fact that the regression analysis showed significant results for hypothesis 2b, but non-significant results for hypothesis 3b only confirms this assumption.

Explaining non-significant results (H1, H4 and H5).

As is the case for the significant hypotheses (H2 and 3), the assumption that the culture clash is not as serious as expected is also applicable to the non-significant outcome of hypothesis 4. The results indicate that it does not make a significant difference whether the international PE-syndicate consist of investors from different capitalist economies or investors from the same capitalist economy when it comes to portfolio firm performance. Apparently investors in both circumstances know how to deal and communicate with each other in order to lead the portfolio firm to the best possible results.

The results of hypothesis 5 may have turned to be non-significant because the intricate knowledge regards foreign markets that international PE-syndicates bring in, might just as well be relevant for a domestically operating firm, if it is planning to expand abroad. Being taken over by an international PE-syndicate might open new doors for a domestic firm to internationalization. Hence, there is not enough evidence to conclude that the factor level of internationalization of the portfolio firm makes a difference when speaking of the implications that international PE-syndicate driven acquisitions have for portfolio firm performance.

Explaining consistency among hypothesis 1 through 4.

Consistency with globalization literature.

6 CONCLUSION

Theoretical implications 1: international Private Equity literature in particular.

Firstly, this research has contributed to obtaining a better understanding of international PE-syndicates in literature, as I have treated country diversity as a key feature of PE-syndicate composition by investigating international PE-syndicates in relation to portfolio firm performance. I find that the change in pre-post acquisition performance is significantly more positive when the portfolio firm is acquired by an international PE-syndicate involving three or more, rather than only two investors. Additionally, I find that it is even more beneficial for portfolio firms when these syndicates consisting of at least three investors come from three or more, than only two different countries.

Theoretical implications 2: international business literature in general.

Practical implications.

Based on the theoretical implications, this research also has some practical considerations to offer. Firstly, I advise investors who are interested in joining an international syndicate, such as Friesland Bank Investments, to team up with at least two other PE-investors from at least two countries other than the PE-investors own country, in order to generate the highest returns. Secondly, I advise debt providers who are thinking about issuing debt to international PE-syndicates, such as Friesland Bank Structured Finance, to finance a portfolio firm taken over by an international PE-syndicate involving three or more PE-investors from at least three or more different countries, as it is more likely that such a firm can live up to its debt obligations. Nevertheless, the number of investors and the country diversity within a syndicate are only two of possible many other factors that are out of the scope of this study, but may have an influence on portfolio firm performance.

Limitations.

Although the theoretical and practical contribution of this study is evident, there are a number of limitations in this study. Firstly, I did not have data on the nationality of PE executives and further details on the control and management of the target firm. According to Meuleman and Wright (2011) internationally active PE-investors often employ executives from the host-country. Therefore, it is difficult to determine the exact influence of international syndicates on the performance of target firms. Secondly, this research also includes acquisitions of unknown stakes. As minority stakes may be among these unknown stakes, it is possible that in the case of some data points, international PE-syndicates were not able to influence portfolio firm performance in the first place. This limitation may have had a weakening effect on the outcomes of this research. Third, I did not take into account the different stakes that different PE-investors may hold in a firm. Therefore, it is possible that certain investors in a PE-syndicate have more control than other investors.

Further research.

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APPENDIX I - VARIETIES OF CAPITALISM

Below a list of countries of origin of PE-investors involved in the dataset. They are classified according to their capitalist economy (Liberal, Mediterranean and Coordinated Market Economy), as depicted by Akkermans, Castaldi and Los (2009) and Hall and Soskice (2001). Current literature concerning varieties of capitalism does not cover all countries of origin involved in my dataset which explains the unclassified countries in the list.

Australia LME Arab Emirates - Austria CME Belgium CME Canada LME Switzerland CME China - Czech Republic - Germany CME Denmark CME Spain MME Finland CME France MME

Great Britain MME

Luxembourg CME Netherlands CME Norway CME Poland - Portugal MME Russia - Sweden CME Singapore - Tunisia - Turkey MME

British Virgin Islands -

Ukraine -