Why do compounding firms obtain significantly higher share price returns compared to other seruice and infrastructure firms?

Abstract

This thesis aims to investigate the phenomenon of compounders and their ability to obtain significant and often unexplainably high returns on their acquisitions. It compares compounders with other service and infrastructure firms in the Nordic region to confirm the existence of these high returns and identify potential reasons for their outperformance. Through regression analysis, looking at value metrics such as revenue growth, EV/EBITDA, and ROIC as potential explanatory variables, the study finds that compounders indeed achieve higher returns compared to the control sample attributing the success to revenue growth and EV/EBITDA. The research also suggests that non-numerical factors such as autonomy and strong in-house competence contribute to their success, as indicated by insights from an interview with the M&A director of one of Norway’s more prominent compounders. The findings of the study provide a foundation for future investigations into a compounders’ success, enhancing the understanding of investment strategies and challenging conventional assumptions about market efficiency.