For the last two years, private equity firms have faced the challenge of putting record amounts of capital raised in the pre-covid era to work productively amid increasing competition for good targets. Top performers recognize that the only effective response is to get better -and smarter – by using innovative strategies in order to increase returns.
The most common strategies used are:
- Buy-and-build
- Merger Integration
Buy-and-Build Strategy – turning more into better
While buy-and-build strategy is not new at all, its popularity is increasing. Buying a strong platform company and building value rapidly through well-executed add-ons can generate impressive returns. At the same time, it is used as a form of multiple arbitrage – scaling up valuable new companies by acquiring smaller, cheaper ones.
In order to understand the concept, one can look at Mid Europa Partners (MEP) investment in Regina Maria (RM) healthcare network, an unprecedented fast-pace development story on the Romanian market. Although at the moment of its acquisition by MEP in 2015, Regina Maria was well positioned as a top player in the private medical services market, the new owner announced massive acquisition plans from the very beginning. Up to this day, more than 20 acquisitions of independent clinics and private medical centers have been completed. Some of them large, some of them smaller, but all being acquired at a discount, if compared to the valuation multiple used for RM itself. With each fully integrated unit, the value of the whole chain will be increasing in the future.
The strategy is similar to the one used by MEP when turning LuxMed into the leading healthcare provider in Poland, before eventually selling it for close to €400 million in 2012, an exit value that generated returns of approximately 2.5 times higher than their initial investment; great thing for investors.
While this strategy may seem easy to execute, let us not forget that More is Not Simply Better. Each target needs to be carefully selected as to fit into a strategic logic that will allow the whole to be worth more than the sum of its parts.
Merger Integration – capitalizing on synergies
Polish Private Equity fund Abris acquired Romanian Shipping and Delivery business Cargus in 2013, because it was attracted by the growth potential of both the company and the sector in which it was operating. Two years later, Abris acquired and subsequently merged Cargus with one of its direct competitors, Urgent Courier, taking advantage of the synergies between the two. Through a further five bolt-on acquisitions (TCE, CRX, Otto, Sprint and X-Curier), the company successfully underpinned and further strengthened its market position. Eventually, it was sold to Mid Europa Partners in 2018 while ranking 2nd in the market.
What was the intention behind Abris’ decision of going for Urgent Courier company?
- Urgent was a larger company at that time, directly competing with Cargus who was 2nd on the market;
- Market share has been rapidly gained, as the resulting business ranked 2nd in the market, so it was behind the market leader;
- The merger created space for the resulting business to grow in new directions (rather than focusing on rivalry between the two companies separately);
- Synergies have been carefully assessed, as to estimate the costs savings that might have resulted by combining operations;
- The value of the final business was immediately higher that the value of the two separated parts.
Is such a move easy to implement? Certainly not.
Integration value capturing needs to stand on 3 main pillars:
- core business– which has to essentially continue unaffected;
- people– because the changes in the organizations’ structure disrupts everybody and take employees outside of their comfort zone;
- processes and systems– as a new architecture should be build to support the combined business.
Designing a good strategy and realizing synergies is essential, but the benefits can be quickly lost if the integration process gets chaotic.
Ruxandra is an M&A expert with 20+ years of experience in investments field.
Her professional expertise has been built in a large number of projects – covering M&A, capital raising, debt raising, financial & operational restructurings and turnaround situations – serving mid-size and large companies.
