It is not easy to develop companies via acquisitions. Most acquisitions fail to fulfil expectations. However, add-on growth can be acquired safely as long as a sound ‘buy & build’ strategy is managed effectively by an experienced management team. Investors are thus becoming increasingly interested in the ‘buy and build’ approach.
Big international companies have been pursuing this approach for years. They build and reinforce their market positions as a result of the targeted acquisition of smaller companies. Less prominent companies are also involved in this serial acquisition method. The fact that they have superior knowledge of the market and have been involved in acquisitions and integrations over many years means that their success rate is very high.
These companies are also increasingly attracting the support of financiers who are keen to embrace this relatively safe method of acquisition. Now that private equity can no longer be relied on to generate easy money through financial leverage alone, returns on investment must be primarily obtained as a result of companies improving their performance. The realisation of synergies via acquisitions is an effective way of achieving this.
Critical assessment
In recent years, private equity firms have been investing increasing amounts of money in ‘buy and build’ strategies. NPM Capital is one of the frontrunners in this area. Nowadays, two-thirds of the capital provided by the firm is used to fund follow-on investments by its existing portfolio companies. NPM finances a number of companies with distinct ‘buy and build’ strategies in sectors that include health, the nutrition industry, business services and internet retail and, over the years, has gained extensive experience with this investment method.
A critical assessment of the business case is vital according to Arie-Willem van Doorne, partner and managing director of BCG, a management consulting firm that regularly provides advice on this type of process. His team investigates the strengths of the companies that are to serve as the platform for the ‘buy and build’ strategy, the quality of the potential acquisition candidates and the added value that must be provided as a result of the gradual acquisition programme. This support helps clients sort the ‘wheat from the chaff’.
“Private equity investors can function as critical sparring partners for management”, says Van Doorne. “The investors can also contribute specific experience, particularly when it comes to negotiating and finalising acquisition and financing transactions. As shareholders and members of the Supervisory Boards, investors remain actively involved in the implementation of the strategy and the integration of the acquired companies. And it works! In my experience, professional investors rarely commit to a poorly thought-out 'buy and build' strategy."
