Private equity funds are increasingly turning to a "buy-and-build" (B&B) approach to boost revenues, realize value and increase returns. The B&B approach, also referred to as an "add-on" strategy, involves the purchase of a platform company, followed by the purchase of multiple related and complimentary targets through share or asset acquisitions. B&B strategies offer an alternative to otherwise potentially slow and cumbersome organic growth by setting the table for private equity funds to capture synergies through vertical integration, combined operational strength and leveraging a whole that is worth significantly more than the sum of its parts.
B&B: the rise
Bain & Company recently released its annual Global Private Equity Report for 2019 (the Report). The Report discusses, among other things, the benefits and challenges of a B&B strategy. The Report defines a B&B strategy as "an explicit strategy for building value by using a well-positioned platform company to make at least four sequential add-on acquisitions of smaller companies."
Despite difficulties in tracking performance and trends of B&B strategies in the market, it appears as though this strategy has been gathering steam in recent years. The Report observes that in 2003, only 21% of all add-on deals represented at least the fourth acquisition by a single platform company. In recent years, that number has reached approximately 30%. In 10% of all cases, the add-on transaction was at least the tenth sequential add-on acquisition. Further reports suggest that add-on acquisition activity has increased significantly since the early 2000s, accounting for nearly 50% of all buyouts in the first half of 2018.
B&B: the benefits
The B&B approach has proven successful for several reasons. Smaller companies often trade at lower multiples, making them attractive targets and affordable investment options with room for outsized gains and opportunities to capture value. Combining multiple smaller companies with a platform company can lead to reduced overhead costs and streamlined operational expenses. Synergies in human resources, technology, and back-office processes can be enhanced and supply chain performance improved.
All of the foregoing can lead to expanded market reach, and boosted returns for investors. However, in order to maximize the benefits of a B&B strategy, time is of the essence. When looking to acquire an add-on company, a private equity fund should typically have a pre-determined plan in place that provides for transition from the evaluation phase to execution. In addition, a well-crafted playbook that accounts for legal, operational and financial expertise is critical.
B&B: the burden
Beyond the fundamental aspects of a typical acquisition, special attention should be paid to cultural integration in the context of B&B acquisitions. Careful evaluation of the various costs associated with integrating employment practices, policies and procedures should also be undertaken. Finally, a unique feature of the B&B strategy is its impact on customers. When acquiring multiple smaller businesses, the platform company should properly consider customer demand, ensuring that target companies can offer compatible products or services that do not undermine the performance or reputation of its constituent parts.
Conclusion
Reliance on B&B strategies by private equity funds is approaching hitherto unseen levels. As private equity funds increasingly look for efficiencies and productivity when deploying capital, adhering to a B&B approach may present a lucrative alternative, and perhaps even superior method of delivering value. While this strategy is not without its challenges, diligent preparation and meticulous execution can yield impressive results.
The author would like to thank Maha Mansour, articling student, for her assistance in preparing this legal update.
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