Mergers and acquisitions (M&A) defied gravity in 2021, and while 2022 has been slower, figures are healthy. Moreover, one of the most popular strategies continues to be Buy and Build (B&B).
A recent on-demand CLE program from the Practising Law Institute (PLI), Introduction to the “Buy and Build” M&A Strategy: What It Is and Why Everyone Seems to Be Doing It, is moderated by Joe Ehrlich, the National Practice Leader for Private Equity and M&A at Brown & Brown, and features top professionals in the M&A space discussing B&B’s risks and advantages.
How popular is it? In 2021, B&B accounted for nearly 70 percent of deals.
According to Eric Tajcher, a partner at Morgan Lewis who counsels businesses on U.S. and cross-border M&A, this is “not particularly surprising” as companies are looking for ways to improve their market share.
What It Is
The program materials define B&B as “a strategy employed by private-equity-backed companies in which the company seeks to expand and extend its operations through strategic add-on acquisitions of other companies in the same sector or adjacent sectors.”
A key aspect is “an opportunity to consolidate in a fragmented industry,” says Brian Kirkpatrick, president of Universal Engineering Sciences, whose firm has grown via an aggressive M&A strategy backed by PE sponsors BDT Capital and Palm Beach Capital.
The goal, of course, is to create a stronger company.
“This may mean reducing overhead or rationalizing functions,” says Frank Finelli, Managing Director at the private equity firm Carlyle. “What can these two companies do together that they can’t do alone?”
Although B&B differs across sectors, a common goal is to find cost and revenue synergies to strengthen the company and then sell it “at a [higher] EBITDA Multiple [than what was paid],” Tajcher says. The EBITDA Multiple is a way of looking at a company’s profitability on a normalized basis. It is frequently used to value business. EBITDA stands for earnings before interest, taxes, depreciation, and amortization.
“Some clients are looking to expand geographically,” he continues, “and others are looking for services or products that are complementary so they can cross-sell.”
Another goal — less common but particularly happening in tech — might be to “take on a talent pool.”
Why Everyone Seems to Be Doing It
In the PLI program, the panelists go on to discuss various drivers behind B&B activity. One is “dry powder” in the hands of private equity, the term for the amount of undeployed capital that has been committed to private equity funds.
In 2021, dry powder exceeded $3 trillion. “That’s a big number,” says Finelli. “We’ve seen broader classes of investors getting involved. Private Equity is a useful asset class for investors trying to maintain a diversified portfolio and B&B is a useful value creation strategy.”
“They’re going to want to deploy that capital sooner rather than later,” Tajcher adds. “The activity is still robust.”
Other drivers mentioned in the materials include ESG (environment, social, governance) trends and the rise of ESG-related companies, plus an inventory of high-quality targets, excellent price-to-earnings ratios, and aging business owners.
Getting Your B&B Right
Identifying the right target in the right industry sector is crucial, as is negotiating the right deal. An almost dizzying amount of factors come into play.
“You have to take this situation by situation, company by company,” Finelli says. “It’s hard to effectively integrate these businesses, and it’s risky. You’ve got to be confident you can mitigate risk with the quality management team you have.”
Due diligence is of paramount importance. The panelists touch on the main areas, including insurance, human resources, information technology and data privacy, and financials.
The due diligence period can stir up a number of legal issues. Parties on the target side may be reluctant to share “information about customers and what they’re paying, or intellectual property,” Tajcher says. On the buyer side, parties might be wary of compliance issues at “family-operated companies who might not engage sophisticated, expensive counsel.”
Ehrlich adds: “Your due diligence needs to follow your thesis. Your diligence needs to make sure that the target company actually is going to deliver all of the things that you’re hoping it will, and it’s going to lead to an accretion in value.”
Even in this time of market volatility, Finelli is bullish about the prospects for B&B. “I think we’ll drive on at a steady pace,” he says. “There’s just tremendous expertise and good companies out there that give me confidence.”
Tajcher predicts that B&B’s high percentage of M&A deals will hold steady, “at least for the next couple of years,” and Kirkpatrick agrees, calling B&B “a very viable strategy for the long term.”
Looking to test the waters in your practice? You can view the full program here for a thorough overview of this space.
Elizabeth M. Bennett was a business reporter who moved into legal journalism when she covered the Delaware courts, a beat that inspired her to go to law school. After a few years as a practicing attorney in the Philadelphia region, she decamped to the Pacific Northwest and returned to freelance reporting and editing.