An interesting concept that quite a few business owners are unaware of is the idea of additive growth via planned, strategic acquisitions. Unless you are familiar with how private equity firms tend to operate, the idea of creating a platform and growing it from a business development standpoint can be new.
Older business owners are likely familiar with the Harold Geneen conglomerate roll-up strategy of the 60s and 70s. Geneen, CEO of ITT at the time, literally acquired hundreds of companies in dozens of industries and created a massive business of many related and nonrelated parts. He grew the company from a medium-sized business with $765 million sales in 1961 into a multinational conglomerate with $17 billion sales in 1970. “Under Geneen's management, ITT became the archetypal modern multinational conglomerate. ITT grew primarily through a series of approximately 350 acquisitions and mergers in 80 countries,” reports his Wikipedia page.
To some analysts this proved to be highly successful, while others disagree.
For a variety of reasons that method of corporate growth fell out of favor and was replaced with a model that stressed strategic expansion via organic growth and well planned, highly targeted acquisitions (as opposed to the ITT model of unrelated acquisitions for the sake of growth alone).
“Highly targeted acquisitions” are what private equity firms now do on a regular basis. They focus on a fragmented industry with good growth prospects, acquiring a “platform company,” which is generally larger, and spending the next 5-7 years “bolting on” or “adding on” to the platform via well planned, clearly reasoned acquisitions of smaller businesses – sometimes quite a bit smaller – than the original platform.
Throughout the years we have examined a number of equity firms that have perfected this method of expansion AND Generational Equity has helped many of these private equity groups (PEGS) in their strategic growth initiatives.
As the following chart from Pitchbook’s 4th Quarter 2015 U.S. PE Breakdown illustrates, the add-on strategy has become extremely popular with equity firms:
Since 2006 add-ons, also called bolt-ons, have become a dominate way to grow for many equity players. “Why?” you might ask. The answer is simple: The era of acquiring a billion-dollar player and hoping to help it grow is relatively rare now. Today, equity firms are moving downstream into smaller transactions because quite frankly it is far easier to integrate a few smaller firms during a 5-year period to create a larger entity than it is to try to hit a home run with a mega transaction.
The equity firms we deal with, many of which specialize in transactions valued below $100 million, are brilliant in their methods. The research that they conduct, which unearths tremendous integration opportunities, leads them to invest in industries with great upside that are comprised of many smaller players who simply need professional management to thrive and grow.
If you own a privately held company today, and you have great ideas about your company’s growth but lack capital, support, and marketing/sales experience to reach your goals, partnering with an equity firm building a platform can be a great idea.
Interested in learning more? Spend some time reviewing our complimentary research library and after doing so, if you still have more questions, then consider attending one of our exit planning conferences where we delve into great detail on add-on strategies as well as other deal structures that may be innovative to you.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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