With this article, I want to gather the corporate finance knowledge that the European M&A community has on buy and build strategies. I would like to start a discussion about what examples there are of good buy and build strategies and along with the failures. I also will give some details on the requirements or conditions for success in a buy and build acquisition strategy. I want to show the difference between buyers that have well thought out plans and others that act more ad-hoc. I will also touch upon the difference between strategic buyers and private equity players that look for a growth strategy via acquisitions. Of course, I will touch upon the issues the M&A advisor has when advising or supporting a buy and build player in executing their strategy.
I am very interested to hear your thoughts, opinions, and experience on a good buy and build strategy. What experience do you have with buy and build strategies? What do you see as important items to differentiate a good buy and build strategy from a bad one?
Over the last 10 years, I have searched for acquisition targets all across Europe for a large number of buyers. Some of these acquisitions can be considered as part of a buy and build strategy. The last years’ acquisitions are a large part of our work. Buy-side assignments are often a bigger part than acting as an advisor on the sell-side where we help business owners in selling a company. As an example, I helped a UK IT company doing acquisitions in Germany, Spain, and the US. Some years ago, I helped two individuals in the hosting industry by sourcing hundreds of hosting companies across Western-Europe and finally acquiring a few companies. Before they started their own buy and build strategy they had executed a similar strategy for a large US stock listed company. When selling cloud-based companies I come across various buyers that have a ‘platform’ company and are supported by private equity to do further acquisitions. I also helped industrial holding companies in acquiring further targets that fit into their portfolio. In the forwarding industry, I brought acquisition targets to buyers that continuously grow to get a larger footprint. The question is if this can be considered as a true ‘buy and build’ strategy?
What is the real definition of a buy and build strategy?
One can say that the definition of a buy and build strategy is when a company expands its operations by acquiring a platform company that can then be built out via further acquisitions. However, a strategic buyer has by nature their own platform company. If it does further acquisitions one could argue this company is executing a buy and build strategy. If a company does 3 or 4 acquisitions across Europe to grow its footprint and service its customers across Europe does this qualify as a buy and build strategy? Does one need to have a formal plan discussed with a management team of a ‘platform company’ to consider a string of acquisitions a ‘buy and build’ strategy?
What do you consider the true definition of a buy and build strategy?
The most obvious type of player in the field of buy and build is, of course, the private equity (PE) player. Industries with a lot of players and limited growth opportunities tend to be consolidated via companies supported by private equity groups. They acquire a high-quality company (‘platform company’) where the management has a good vision and strong experience with acquisitions. Before executing this first acquisition they discuss and agree on the future growth plan (via acquisitions) with the management. When all is acceptable, the plan can be executed.
The second type of player in the field of buy and build is, of course, a strategic buyer that does various acquisitions and has defined strategic growth via acquisitions as its business plan. These can be stock listed companies or family companies.
The third category can be individuals that have experience with strings of acquisitions in their previous careers and now want to perform such a strategy for their own account. In this case, they are often supported by financial sponsors as access to capital is a clear requirement to execute a ‘good’ buy and build strategy (see next paragraph).
An important item for a buyer is to have a clear strategy before the start of the acquisitions. Personally, I think it is very important that the strategy is clear, fully approved and known to all the people involved in the acquisition process. Further, access to capital is crucial. If you have access to capital it seems minor, but if you lack financial resources or need to prove your business case for each acquisition it is a different ball game. It makes a significant difference if you can do acquisitions for a stock listed company with unlimited funds and access to capital or if you need to raise equity/debt for each individual transaction you plan to do. However, in the world we live in currently, with so many PE groups around, access to cheap capital is normally a given. Without good and secure access to funds, it is better not to start a buy and build strategy at all. Once these first two requirements are fulfilled another and more important requirement is having the right people! In the end, it is the people that do the acquisitions, motivate and manage the new teams and owners to grow everything into a group that has to become a new company.
Spending a lot of time upfront helps in being ready for the integration process when the time comes. A clear integration plan is required as many acquisitions fail. We see buyers that have a large team available and others that come less prepared. I have written further articles that you can find in the CFIE integration section so this article’s focus is pretty concise. Of course, integration is a major phase and a very important part of an acquisition and it needs to be planned in detail in advance. For further details on how different type of buyers approach acquisitions and how best to prepare please read further at www.corporatefinanceineurope.eu/blog/acquisition-strategies-buyers.htm
For a corporate finance advisor like us, it can be very appealing to work on a buy and build strategy. As this can mean continuous work and the opportunity to offer support through various acquisitions. We can provide support in getting a good idea of all target companies available in the market. We map all possible targets and describe for each target how well it fits in the acquisition strategy. This description of company profiles helps in testing the acquisition strategy and fit of the targets. The experience gathered can contribute again to further finetune the acquisition strategy.
Often buyers with a buy and build strategy don’t know the market where they want to do an acquisition as it mostly consists of a new country or territory. The question is, of course, what buyers do when they start to know the markets better. I have seen cases where international buyers try to get the advisor out once they feel they know the market and want to save on acquisition costs.
I am very much interested in your opinion and the experiences you have had with buy and build players? What do you see in your daily M&A life as the added value in regard to different acquisition strategies of buyers? What is crucial in your opinion when a corporate finance advisor wants to support a good buy and build strategy? Please give your opinion below the article.
Some industries are of course more suitable than others to buy and build strategies. Industries that have seen a large degree of consolidation are the distribution industries. Distributing chemicals or other products across Europe is relatively straightforward once you have access to the suppliers. After that, put very bluntly, it is merely a case of having local offices and distribution warehouses in all the individual European countries.
Capital-intensive industries are also well suited for acquisitions as small family companies often don’t have the funds to invest heavily in new factories or production units.
The Internet also gives rise to consolidation opportunities as cloud platforms, once set-up, can host many clients. Processes can be automated and hence, the combination or addition of customer portfolios can have a very interesting effect on the profitability of a company. As an example, one can look at the hosting industry where the processes are fully automated where it is important to create a large volume of clients.
Which industries do you see as good examples for consolidation or a buy and build strategy?
For this piece, I would ask for your opinion and input. Do you have examples of good buy and build strategies? Or do you know examples of historic failures? It would be interesting to know where and why a project failed or was successful.
My experience it that from the outside a string of acquisitions looks interesting, but without a good internal integration, there are limited synergies. Once the group get sold to a larger industrial player or listed on a stock exchange it is still the same group of individual companies. The only difference can be that it is valued higher. That’s not a story where acquisitions have helped to make it a better company but just a financial play to benefit the shareholders.
Altogether, there are a lot of items related to buy and build strategies. Please provide your feedback and opinion on this topic. What experience do you have with buy and build strategies?
What do you consider as good acquisition strategies and what are important tips or suggestions you want to give to companies executing buy and build strategies?