With the uptick in global private equity add-on acquisition activity comes the usual M&A-related risks, but getting out in front of any potential antitrust challenges is one of the most critical steps investors must take.
The management consulting firm Bain & Company recently analyzed the incidence of the so-called “buy-and-build” approach, which it defines as “an explicit strategy for building value by using a well-positioned platform company to make at least four sequential add-on acquisitions of smaller companies.”
This is a popular strategy, Bain says, because it provides “a powerful antidote to soaring deal multiples.”
In their Global Private Equity Report 2019, Bain analysts said this add-on strategy gives general partners in the private equity industry “a way to take advantage of the market’s tendency to assign big companies higher valuations than smaller ones. A buy-and-build strategy allows a [general partner] to justify the initial acquisition of a relatively expensive platform company by offering the opportunity to tuck in smaller add-ons that can be acquired for lower multiples later on.”
The approach brings down the firm’s average acquisition cost, puts capital to work, and increases value through scale and scope. It also gives the general partners time to build value through asset synergies and cost reduction.
“The objective is to assemble a powerful new business such that the whole is worth significantly more than the parts,” the Bain report says.
Steady Increase Across Industries
Based on its review of transactions during the last six years, Bain sees a steady increase in add-on activity. In 2003, it says, “just 21% of all add-on deals represented at least the fourth acquisition by a single platform company. That number is closer to 30% in recent years, and in 10% of the cases, the add-on was at least the 10th sequential acquisition,” Bain analysts determined. This strategy is being deployed across industries, the report says, adding that deals are also “moving out of the small- to middle-market range as larger firms target larger platform companies.”
In his April 12 article – How to Be a Trusted Attorney in the Age of the PE Add-On – LexisNexis® Law360 editor Benjamin Horney put it this way: private equity investors like add-ons because they can “pump up the value of the portfolio companies ahead of an eventual exit.”
However, Horney wrote, these deals can “require delicate legal maneuvering” when it comes to things like financing, employee retention, and anticompetitive issues. If a client has an existing platform in a specific industry, depending on its share of the market “things can get complicated from an antitrust perspective,” he wrote.
Steven Shoemate, co-chair of Gibson Dunn & Crutcher’s private equity practice, told Law360 that antitrust hurdles will make your client “potentially less of a desirable buyer.” He said getting ahead of the hurdles can help, such as having an economist perform a market analysis and having counsel engage regulators early in the process. “[C]oming up with a plan so you can control the conversation with regulators rather than just being reactive …. That’s definitely a strategy that can pay off,” Shoemate told Law360.
Jennifer Oliver, Counsel at MoginRubin, said, “It’s vital when making these deals to engage experienced and competent antitrust counsel early on. There is a need for quick and cost-effective filings,” she said, referring to those required by the Hart-Scott-Rodino Antitrust Improvements Act of 1977. She added that qualified counsel will be able to work effectively with regulators and possess deep knowledge of the law on interlocking directorates.