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Steinbeis M&A Partner Ulrich Praßler explains in an interview with VR Equitypartner what is important in buy-and-build strategies.
VR Equitypartner’s portfolio comprises a good 100 investments in medium-sized family businesses. In many of these investments, the equity financier pursues a buy-and-build strategy together with the entrepreneurs. It is supported in this by experienced M&A advisors such as Ulrich Praßler, partner at Steinbeis M&A, who, among other things, accompanied the two add-on acquisitions of the Kälte Eckert Group, a portfolio company of VR Equitypartner. In an interview with VR Equitypartner, he describes what is important for a successful buy-and-build strategy.
Mr. Praßler, what are the typical buy-and-build strategies?
Basically, a distinction must be made between vertical and horizontal approaches. Which approach makes more sense and is more efficient cannot be said in general terms – it depends entirely on the market and company situation. A horizontal strategy is about consolidating a highly fragmented market with similar business models. We also see this form of buy-and-build, for example, when regulations are relaxed and consolidation is intended to expand the company’s own market position. In the vertical approach, on the other hand, certain elements of the value chain are bought, usually in the form of technological extensions. For example, a traditional insurance company acquires a stake in an insurtech company. Both sides regularly benefit from this: The insurance company gains access to future technologies, the insurtech gains access to a broader customer base. Merging is often more efficient and risk-adequate than building up one’s own technology know-how or a large distribution network.
How do you approach a buy-and-build strategy in a structured way? What preliminary considerations should I make?
Always think of your strategy from the goal: What do you want to achieve for your company? In doing so, you should also think about the exit perspective right away. It is not only about the “buy” aspect, which may still be relatively simple, but also about the “build”. That’s why you should stay away from purely opportunistic transactions, as tempting as they may be. Otherwise you will have a hodgepodge of investments, but no coherent whole. The goal should be more than just the sum of the individual parts.
What is the central criterion for who becomes a platform and who becomes an add-on?
Every platform needs really good management. It must not only have a convincing goal,but it must also be able to integrate the companies it buys. This is not least a question of resources. Both the M&A process itself and the subsequent integration of the target are time-consuming – so one should not shy away from a sober analysis of whether the management team can handle this task.
How does the M&A advisor explore the field of sensible options? And: Not every company that would fit is for sale. How many compromises must and should be made?
First of all, the M&A advisor – see my recommendation above – must be clear about the goal and focus of the buy-and-build concept. In order for an M&A advisor to be able to make a suitable pre-selection on this basis, he must not only understand the strategy of the buyer, but also understand the business models of the targets. Then the typical M&A process takes effect. Among other things, it is important to meet the targets at eye level. A senior M&A advisor usually finds it easier to be taken seriously by the managing director or shareholder of the target company. Nevertheless, a certain flexibility will usually be necessary. And realism: in case of doubt, the top companies on the target list are not to be acquired at all. However, any compromise should not be at the expense of one’s own goal.
How do you deal with duplications and overlaps, e.g. when there are overlapping business areas?
In horizontal strategies, overlaps in the business model are often deliberate. Otherwise, undesirable duplications must be taken into account in the valuation – i.e. the purchase price offer.must be taken into account. Then you have to wait and see how the target reacts. But: It is better to cancel a transaction than to be pushed into a hasty purchase by investors with exaggeratedly dynamic growth expectations, for example.
Is the complete takeover of the target a must for a buy-and-build strategy?
Basically, for a platform company: If it does not own 100 per cent of the add-ons, it is very difficult to sell the later on is very difficult. Initially, however, a buy-and-build strategy can still be more flexible on this issue. Sometimes for good reason, for example, because existing good management should continue to be incentivised and involved. Towards the exit, however, every platform shouldbe able to create clear ownership structures. The purchase agreement must contain appropriate options.options. In my experience, strategists as buyers always want to acquire 100 per cent of the target right from the start. This is because strategists usually have their own talent pool and therefore often look at management differently than financial investors.
Mr. Praßler, one last question: What are the most likely reasons for buy-and-build strategies to fail?
A mistake that I see again and again: hasty purchases are made because the investors of the platform companies exert pressure. Such purchases are then at the expense of the strategy, and in the end nothing is gained. A second problem – as with so many M&A transactions – is integration. In order for the plan on paper to become reality, a lot of effort is required. And that in many places at the same time: personnel, products, processes… That is a big challenge, sometimes even an excessive demand. And I see one last breaking point: in buy-and-build strategies, smaller companies are often acquired as add-ons. But these often have no M&A experience and are overwhelmed by the demands of the process. Therefore, it is very important that the buyer and the M&A advisor adjust to the target and structure and execute the process accordingly.
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