Expansion through mergers and acquisitions is the most time-efficient way for Private Equity firms to grow companies and increase shareholder value. While organic top-line growth and margin expansion are common levers to drive value creation, they can often take time to implement and realize benefits. With the clock ticking to return capital to shareholders and drive top-quartile IRR, M&A offers a more time-efficient strategy for Private Equity value creation.
By creating a “platform” company, PE firms can utilize M&A to add on additional companies, purchasing them at lower valuation multiples than the expected valuation multiple of the larger company.
The small scale of these acquisitions in comparison to the platform company can cause management teams to underinvest in integration, thinking that the newly acquired business will easily “tuck-in” to the larger platform. When acquisitions are small, there is logic behind this. It may not make sense to invest significant time, effort, and money integrating an acquisition that makes up less than 10% of your EBITDA.
However, we at Mann Partners find there is a tipping point when a platform company invests in enough add-ons without investing in integration, cracks start to show. So that begs the question: When do you invest in integration for add-on acquisitions?
Here are a few signs CEOs and Private Equity Investors should look for that indicate it’s time to invest in integration:
- Total value of add-on acquisitions exceeds ~25% of total EBITDA
- Eroding margins across the platform company
- Declining performance of the acquired asset
- Fragmented customer experience
- Unrealized cost synergies
- Duplication of roles and resources
- Lack of leadership role clarity and accountability
- Acquired capabilities are not being shared across the organization to drive value
- Not yet capturing acquisition valuation multiple expansion
Successful acquisition integration is critical to realizing the expected value to drive shareholder returns, and when done right, is the fastest way to grow your company. But as many companies deprioritize this effort and issues begin to arise, unsuccessful integrations also hold the potential to ruin the value creation plan and exit strategy.
At Mann Partners, we work with private equity investors and portfolio companies, taking the company leadership team through a structured process to effectively integrate acquisitions and design the optimal operating model to deliver on your strategy.
Are you getting the expected value out of your add-on acquisitions? Or do you need to invest in integration?