M&A East: Add-On Deals

The Merger Verger just returned from M&A East, perhaps the preeminent middle market acquisition event of the year in this part of the world. M&A East is put on by the Philadelphia chapter of the Association for Corporate Growth and is very well done and very well attended.

While most of the attendees come for the rich networking opportunities, there are also work sessions and presentations … actual “content.”  The Merger Verger attended one roundtable session dealing with the large role that the Buy-and-Build strategy and add-on deals are playing increasingly in the private equity world.

Building BlocksWe noted a number of interesting or useful points:

  • The Buy-and-Build investment strategy has both the advantages and disadvantages of focus: wisdom, experience and increasing market power and multiple arbitrage on the upside; concentration and lack of diversity on the down side. Pick your poison.
  • Market fragmentation can be an important attribute of a sector appropriate for Buy-and-Build but it requires some perspective and caution (read “better due diligence):
    • Is fragmentation the result of incremental market development over time or some fundamental customer or sourcing requirement?
    • A market that has long been fragmented may have an entrenched fragmented purchasing process on the customer side, making the synergy potential of national footprint harder or slower to realize.
    • As fragmentation decreases through consolidation, multiples can skyrocket.
    • Once the fragmentation has been wrung out, where will the next generation of growth come from?
  • Some fragmented industries that were mentioned as undergoing PE consolidation: landscaping services, specialty physician practices, industrial crating.
  • Add-on deals don’t have to smaller than the core operation although The Merger Verger notes that the integration can be more subtly complex with the egos of the newer larger company clashing with those of the smaller original company. We’re bigger and stronger than you. Yeah, but we were here first, doing fine on our own, thank you.
  • When doing add-on deals, the question of branding looms large. It is highly possible that a small local brand carries more value in its market than a larger, more visible one. Landscaping services was an example of this.
  • On the question of making acquisitions during economic downturns, most of the roundtable presenters felt that it was important to carry on. One presenter saw downturns as an opportunity to average down their purchase multiples.

M&A East 2018-10-26 12.42.50

  • Conversely, both presenters and attendees noted that many middle market sellers don’t pay that much attention to multiples; they focus on price. (Multiples do not affect a seller’s retirement plans; raw dollars do.) In that context multiples can get ugly in a downturn.
  • While the topic of integration was listed on the agenda, it got – as it often does – a short shrift. There is still this sense that getting through closing is the Win. It is not. The Verger repeats: you will have a vastly more predictable and successful outcome if you actively manage the “hows” of integrating your add-on deal:
    • How are we going to realize the strategic intent behind this deal?
    • How are we going to avoid the identified risks factors?
    • How are we going to keep the best producers of the target company?
    • Exactly how are we going to get our products selling through their channels?
    • How are we going to make their square product design (or production or management or culture or sales) peg fit into our round hole?
  • Seller-entrepreneurs like the Buy-and-Build strategy:
    • They believe the buyer better understands “their baby”
    • It’s easier to get buy-in on visions and plans and investment
    • If the deal involves contingent payments, they have more faith in the the potential payoff
    • “Buy-and-Build” just feels a lot more appealing than “Slash and Burn”

Buyers like the B+B strategy.  Sellers like it too.  It may not be for every PE firm but it’s here to stay.

“Bravo,” says The Merger Verger.  And Bravo to M&A East.

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Simple. Elegant. Successful. (Repeat)

As a kid, did you ever play the Pete and Repeat game with your friends? The one about Pete falling overboard and Repeat being left? Then the whole thing plays round again (ad nauseum). Get it? Repeat is all that’s left? (Yeah, I know …)

Anyway, it turns out (observation courtesy of the smart folks at Bain & Company) that this is the most successful formula for sustaining and growing a business: focus on that which you do uniquely well; understand intimately why it is better; communicate that understanding throughout your organization; repeat.

Successful practitioners of roll-up acquisitions get that formula particularly well. Ditto for those whose acquisition sights are set on bolt-on deals. Have you read the most recent annual report from Berkshire Hathaway? There’s a strategic theme there. Sure, the portfolio is diverse but the acquisition M.O. of each of those companies is focused tightly on growing the sweet spot. Simple. Elegant. Effective.

Simplicity means that everyone in the company is on the same page – and no one forgets the sources of success.

Chris Zook and James Allen, two Bain partners, have written a book on “repeatability” in business, concluding that truly successful companies have crisp elements that differentiate them from their competition and they aim to maximize those differentiators to the exclusion of everything else that ambles down the strategic pike. The book, entitled “Repeatability: Build Enduring Businesses for a World of Constant Change,” is available on Amazon and spin-off articles are available on the Bain website (links below). The Merger Verger recommends the recent article in Harvard Business Review; it has many concepts that have direct application for acquisition strategy and integration planning.

There are several elements of the “repeatability” concept that bear on dealmaking and acquisition integration. First (as always) is the message of strategic intent; get that part right and many of your acquisition risks will be behind you. But … this is not just a process of thinking you are good at this or that; you must really understand your uniqueness in the marketplace. No fluff allowed.

The next key element is to articulate that message throughout your organization. In fact the Bain authors state in no uncertain terms that the greater the distance between a company’s strategic plan and the men and women who are called upon to carry it out, the greater the risk of dissipation, digression, disinterest and disaster. Keep your competitive differentiators clear and make sure that your team knows them and is invested in them.

The final key is the simplest to describe and potentially the hardest to do. Repeat. That is, repeat without straying from your strategy and your differentiators.

In closing, let me pause on the second of the three elements: articulating the message. The Bain authors imply that this step is too often overlooked, under the theory that everyone already knows what their employer does and what it stands for. Not true, they say. But if going the extra mile to articulate issues of strategy and competitive uniqueness is a value driver in normal settings, how much more so in the context of an acquisition?

A link between well-defined, shared core principles and frontline behavior was more highly correlated with business performance than any other factor we studied.

Take the time to truly understand, articulate and sell your company’s strengths to your newly acquired staff. They will be better performers and better apostles for it.

Some useful links:

Bain & Company website

Bain specialty site on Repeatability in business

HBR article: the Great Repeatable Business Model

Amazon.com: Repeatability

About the Art: Danish architect Bjarke Ingels Group’s award winning design for Kazakhstan’s new National Library, modeled on a möbius strip.

Is Big Riskier than Many?

The Wall Street Journal is reporting today that the flow of mega-mergers – deals over $1 billion – is at its lowest level in four years.  In board rooms across the country CEOs are shedding their bravado and doing smaller deals and bolt-ons and other things that can be more easily brought into the fold.  Risk is out.

But what really makes an acquisition risky?  Seems to me that from a practical perspective deals have two kinds of risk:

  • Investment risk → Assuming all goes according to plan, am I paying the right amount of money for this company?
  • Execution risk → Having paid the right amount, am I responding in a way that will enable me to achieve the intended objectives (and thus the returns)?

It is axiomatic that by reducing the amount of capital put at risk one reduces the overall investment risk.  (Even The Merger Verger can figure that out.)  But I can also figure out that smaller deal size generally means smaller upside potential. 

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