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‘Stick to the buy and build plan’, Johan Terpstra, Investment Director at NPM

Buy & Build

16 September 2016

Many companies aim to increase their market share both through organic growth and acquisitions. This type of buy and build strategy provides opportunities, but also entails risks. Johan Terpstra, Investment Director at NPM Capital, answers five questions about buy and build.

1. Some people say a buy and build strategy is primarily attractive for PE firms that want to rapidly raise a portfolio company’s revenue and profitability in order to make it easier to realise a successful and relatively fast exit. What is your view on this?

‘I think a good buy and build strategy is always attractive, not just for PE firms. Generally speaking, it is true that larger companies are more diversified in terms of geographic spread and services and/or products and consequently run less risk. Larger companies are generally also financially stronger, making them better able to keep ahead of the current fast-paced developments, attract talent and recruit higher quality management. This might also explain why, apart from any potential commercial and cost synergies, higher multiples are paid for larger companies. Larger companies also offer greater exit possibilities: an IPO by definition requires a minimum size and strategic investors prefer to consider a small group of larger companies rather than a strand of very small pearls.’

2. While there’s no such thing as the perfect buy and build strategy, if you were to name five success factors for a random buy and build strategy, what would they be?

‘There are various buy and build strategies that differ significantly from each other. Sometimes they’re defensive in nature, for example the acquisition of one of your critical suppliers that is about to go under. Other build and buy strategies are very focused on the future, for example in the case of the acquisition of a company that has developed a certain new technology. But if we take only the classic strategy of market consolidation, the first success factor that comes to mind is: ensure the management has devoted sufficient time to it. An acquisition can be made quickly, but making the ‘right’ acquisition is a much more difficult process. The second would be: make sure the acquisition is in line with the strategy, ensure you know all the potential candidates and make contact with potential preferred candidates as soon as possible. Number three: stick to the buy and build plan because time and resources are limited, so don’t be overly opportunistic. Four: remain realistic – don’t let yourself get caught up in fantastic hockey stick forecasts and far-reaching commercial and cost synergies. And, last but not least, number five: ensure a quick, but meticulous integration. Every acquisition is a bumpy road: you’re always dealing with people and the situation inevitably turns out to be different than you initially envisioned.’

3. Which of these success factors is decisive for NPM and why?

‘In my modest opinion, I would say the latter – a fast, but meticulous integration. Companies that implement a buy and build strategy, but don’t sufficiently integrate acquired companies, can spiral out of control. We’ve seen numerous examples of this reported in the media recently.’

4. It happens fairly often that PE firms are quick to make changes in the current management team, and sometimes even replace it entirely, at the companies they’ve acquired. What’s your approach?

‘We prefer to leave the current management team in place because they are, after all, the ones who know the business. The current management team can also ensure a smooth transition within an integration process, without this resulting in too much internal and/or external turbulence.’

5. Do you think bolt-on acquisitions offer any particular advantages over a general buy and build strategy?

‘If by bolt-on acquisitions, you mean an acquisition of a company that offers exactly the same services and/or products that you do in the same geographical areas, then there’s obviously one advantage: it will be much easier in terms of integration.’