When Buy-and-Build Works, And When It Doesn’t

As we have written before, buy-and-build strategies are popular in the private equity world right now. But they don’t work every time. Let’s take a look at what makes a “good” or “bad” buy-and-build approach.

An example of success

When Investcorp acquired Chicago’s Berlin Packaging for around $410 million in 2007, it was already a leader in the container industry. That success grew when seven years and four strategic acquisitions later, Investcorp sold out to Oak Hill Capital Partners for $1.43 billion, creating a better than three times return. Moving forward, the leadership team has doubled down on their buy-and-build strategy with four more major acquisitions and a scattering of smaller ones. In November 2018, they attracted $500 million in new capital from the Canada Pension Plan Investment Board with the goal of more acquisitions in North America and Europe.

Why buy-and-build works

There are a couple specific reasons why buy-and-build strategies produce such impressive results. First and foremost, the approach takes advantage of the fact that the market tends to assign larger companies higher valuations than smaller ones. According to PitchBook Data, in 2018, companies of less than $25 million had a median purchase price multiple of 10 times while companies between $500 million and $1 billion had closer to a 20 times multiple.

A general partner (GP) can justify a larger initial acquisition of a platform company to start, provided it offers the opportunity to add smaller companies that maybe acquired for lower multiples later on. The firm’s average cost of acquisition is brought down overall, while the synergies of the subsequent purchases build additional value.

Easier said than done

The platform company is one of the most critical parts of any buy-and-build approach. It must be stable enough to support the acquisitions—infrastructure like IT systems and repeatable financial and operational models must be scalable and ready for expansion. Then each add on company must closely complement the platform company, actually meshing and not just adding on incremental revenue.

A buy-and-build approach can go wrong, such as in the case of Aurora Foods. In the 1990s, with encouragement from investors, Aurora started buying up premium food brands such as Mrs. Butterworth’s. In 1998, it bought Duncan Hines and it merged with Van de Kamp’s, a frozen food giant. But Aurora never paid off for the private equity owners. Bain identified synergy as the primary problem in the deals. Although budget frozen foods and premium shelf-space foods are both “foods,” they have “very little overlap in terms of costs and capabilities.”

Whether you are looking to buy a company or sell a company, understanding what makes a buy-and-build strategy successful is critical. Identifying clear, value-driving synergies seems to be the secret sauce.

Symmetrical assists Middle Market companies strategically assess their options and prepare for big transitions. If you are curious whether we may be a good fit for you, please contact us for a confidential discussion about how we can help.

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