Buy to Build

Private equity firms seek companies that will grow through bolt-on acquisitions

To explore how private equity firms identify, choose and nurture portfolio companies that can grow through bolt-on acquisitions to lead an industry, Mergers & Acquisitions convened a special roundtable discussion, sponsored by Benesch, a business law firm prominent in middle-market dealmaking. The discussion provides a range of perspectives on the strategy. Participants include two private equity investors, one portfolio company chief executive, an investment banker and an attorney.

Mary Kathleen Flynn, Mergers & Acquisitions (moderator): Why is buy and build an important strategy?

James Hill, Benesch (pictured): I think it is an important strategy because today in our economy, companies are not growing organically quickly. So if you are buying a company and really hoping to get a high internal rate of return on the basis of organic growth, that alone will probably not get you there, unless you are a highly technologically-driven company with a lot of proprietary technology that you are developing constantly.

A far better approach that a number of private equity firms have adopted is finding an industry that they have some expertise in and buying a platform company that meets both the infrastructure needs and the product differentiation needs to give them a leg up on the channel to buy additional companies in that industry. It's very important to grow both organically and acquisitively. But, ultimately, when you are selling your company, or you are recapitalizing your company, it's very important to be able to explain to a buyer that you have done some significant operational improvements in your company to grow both organically and acquisitively. That makes it a more attractive target for someone who's looking to buy his or her next company.

Russell Greenberg, Altus Capital Partners (pictured): In my opinion, the buy and build strategy works if you have a management team that can execute it. We look for people that have a bigger vision, that have had experience running larger companies, that think strategically about where the business should be in five years, not just how to make the current-year numbers. They are thinking product-wise. They are thinking strategy and the tactics to do it.


Timothy Nelson, Saw Mill Capital LLC (pictured): We encourage our companies to think out 10 years, asking them, "How do you position your company to be ready to double in size for the next investor?"

Hill: One thing Benesch has done successfully over the years is find great CEOs who have been very successful in an industry. One of the metrics we have to check off fairly quickly is their acquisition experience and their ability to integrate those companies. There are a lot of successful CEOs who have grown companies but who don't have acquisition experience. The CEO really needs to have gone through that process several times and be able to point to some success at integration, or you are kind of starting out behind the eight ball. There's probably an exception when people are running large divisions or subsidiaries of larger companies, when they may not have had the opportunity to make acquisitions.

Greenberg: We've had success with a CEO who hadn't done add-on acquisitions but was a strong CEO from the strategy point of view. Our firm laid out strict guidelines; we had the right planning; the chief financial officer was very on top of everything; and it worked out okay.

Nelson: We had a similar situation with our former portfolio company, Pexco LLC. It was a corporate carve-out, and so that was a manager who didn't have acquisition experience prior, but his entire career was with the parent company, Filtrona plc. What made him strong was that he was very disciplined. He was process-oriented, really focused on the operations of the business, and he drove the disciplines in the organization. When you're executing an acquisition program, that's critical. The easy part, I would say, is buying. The hard part is integration, post-close. It's fundamentally critical to have those operational practices and disciplines in place to integrate the companies. You need to have the strong discipline culture when you are acquiring those entities.

Flynn: Ted, before becoming CEO of Royal Adhesives, did you have acquisition experience?