When it comes to growth, a buy-and-build strategy can be an effective way to create shareholder value. Matthew Caffrey explains the benefits of this strategy and the challenges that this presents to management teams.
At Livingbridge, we have worked very closely with our investee management teams to support them in thinking through when, why and how to acquire assets that add value to their underlying businesses. In total, we have supported our portfolio in making more than 100 acquisitions, with just over a third of current investees pursuing some form of buy-and-build strategy.
A buy-and-build strategy can be structured around smaller bolt-ons or sizeable step change acquisitions and management teams should carefully consider the benefits and downsides of each.
Bolt-ons can often be purchased for favourable prices and can be integrated relatively easily. Pursuing this strategy typically works well in fragmented markets where multiple assets can be combined to create a unified (and valuable) asset of scale, but it can take time to deliver if the available acquisitions are relatively small. Businesses that are capable of rapidly acquiring smaller bolt-ons usually have robust processes and technology platforms in place. In addition, the management team needs to be set up in the right way, with specific individuals focussed on executing the deals (usually an M&A director) and an operational team concentrated on integration.
Step-change acquisitions can clearly deliver a larger step-forward in scale more quickly. However, they can be time consuming, harder to source and distracting for management teams. Because the post-acquisition fit is so important, they are also potentially more risky if integration goes poorly or the cultures of the respective businesses clash.
In both examples, it is key for management teams to understand why they are acquiring. What often binds a buy-and-build strategy together is spotting a space in a market that as a company and management team you want to occupy. Thinking through the talent, product, customers, geographic reach and scale that you might need to acquire to step into that space is often a helpful starting point for shaping acquisition criteria. However, for many management teams, making an acquisition can be a big step, and if it is their first one it can be an uncomfortable step into the unknown.
Bringing in external expertise, such as a private equity investor, can provide the confidence and support for management teams to really think through a strategy and how to execute it. This support may include shaping an acquisition wish list, identifying and approaching targets, negotiating deals, scoping due diligence, and thinking through whether additional support is required to aid the integration effort (e.g. an integration director). One of the key elements that needs sufficient focus are the synergies on offer. They can often accelerate profits and allow an acquirer to arbitrage down entry pricing if delivered well. However, in Livingbridge’s experience, it is fair to say that if synergies are not delivered in the first 12 months, they will not be delivered at all.
At Livingbridge, we have experience of all shapes and sizes of acquisitions. In Manchester, M247 represents an excellent example of a business which we have supported to deliver both a step-change acquisition and smaller bolt-on. In 2014, we invested in Metronet (UK) Limited, a wireless connectivity business focussed predominantly in Greater Manchester as part of a £45m buyout. Between 2014 and 2016, the connectivity footprint continued to expand organically and then in late 2016 we supported management in the £47.5m acquisition of M247. M247 added product extension through a hosting portfolio of products, international reach via an extensive pan-European transit network, engineering talent and scale. In early 2017, this acquisition was complemented by the subsequent bolt-on of Venus Communications, which added a fibre network in London and delivered strategic market entry into the Capital.
These acquisitions were the culmination of 12 months of Livingbridge working closely with the Board to think through where we wanted the business to be positioned and a complete market mapping exercise. To support the acquisitions, we supplemented the team with a commercial director and an interim integrations director to focus on synergy planning and delivery. Having completed the deals, we have grown profits since 2014 from £4.2m to over £16.0m and built a pan European connectivity and managed services provider.
There are many stories like this across the private equity industry and buy-and-builds are an area that many houses are increasingly focussed on. In an increasingly competitive market, deploying capital in a market you know and a management team you believe in is a smart use of money. The benefits of the right private equity backer to the business is just as clear – through expertise, resource and their business network they can help you work through the right strategy, source acquisitions and help create the synergies to drive the greatest value.
If you’d like to find out more about how we’ve supported our investee companies in making acquisitions please contact investments@livingbridge.com
