Why buy and build?
After working at Deloitte and understanding the technicalities of finance and M&A, I spend the last three years in buy and build strategies for e-commerce, retail and online businesses. In this blog we give an introduction to buy and build, how it can add value and what the common pitfalls are.
Buy and build strategies have become increasingly popular in the business world due to their ability to create significant value for companies. By acquiring existing businesses and integrating them into a platform, organizations can benefit from economies of scale, increased market share, and diversified revenue streams. This approach allows businesses to quickly expand their capabilities, enter new markets, and achieve operational efficiencies that may not be attainable through organic growth alone. Overall, buy and build strategies offer a proven pathway to accelerating growth, optimizing resources, and maximizing shareholder value for businesses looking to scale and succeed in today's competitive landscape. But there are some risks to it as well.
Buy and Build Strategies
Buy and build is a growth strategy that involves acquiring multiple companies in the same industry or related industries to create a larger and more competitive entity. By acquiring existing businesses and integrating them strategically, companies can achieve rapid growth, increased market share, and operational efficiencies. This strategy allows the acquiring company to enter new markets, diversify its product or service offerings, and capitalize on synergies between the acquired businesses.
Successful Examples of Buy and Build Strategies:
Berkshire Hathaway: Warren Buffett's conglomerate has successfully implemented a buy and build strategy by acquiring a diverse range of businesses across various industries such as insurance, utilities, and consumer goods. By acquiring well-established companies and providing them with operational support, Berkshire Hathaway has achieved significant growth and created a highly successful business conglomerate.
Constellation Software Inc.: Constellation Software is a Canadian company that has effectively executed a buy and build strategy in the software industry. The company acquires small to medium-sized software companies and provides them with resources, expertise, and support to accelerate their growth. Through strategic acquisitions and operational improvements, Constellation Software has become a global leader in the software industry.
Red Ventures: Red Ventures is a buy-and-build company that has acquired prominent brands such as CNET, The Points Guy, Lonely Planet, and many others. With a strategic focus on acquiring established businesses, Red Ventures aims to leverage its expertise and resources to drive growth and profitability within the brands it acquires. By identifying synergies and implementing effective strategies, Red Ventures continues to expand its portfolio and strengthen its position in the market.
These successful examples demonstrate the effectiveness of buy and build strategies in driving growth, creating value, and establishing market leadership in various industries. By executing strategic acquisitions and integrating acquired businesses effectively, companies can leverage synergies, optimize operations, and achieve sustainable growth in a competitive marketplace.
Value creation
Vertical and Horizontal strategies
Within buy and build, there are two main “directions”: vertical and horizontal. In vertical buy and build, the focus is on acquiring companies within the same industry but at different stages of the value chain. This strategy allows the consolidation of operations and enhances control over the entire production process, for example from raw materials to distribution. Like Tesla who owns the origination of energy through solar panels and distributes via their supercharger network. They obtained this by acquiring SolarCity, a manufacturer of solar panels.
Horizontal buy and build involves acquiring companies that offer similar products or services. This strategy aims to capture a larger market share, reduce competition, and benefit from economies of scale in production and distribution. In the example of Tesla this could be acquiring a company named Fastned that distributes electricity in the Netherlands to grow it’s customer base and number of charging stations.
Examples value creation
Market Expansion: Acquiring businesses in new geographic regions or with complementary customer bases helps in expanding market reach and increasing sales.
Diversification: Buying companies with different products or services can diversify the revenue streams and reduce overall business risk.
Talent Pool Enhancement: Consolidating companies allows for a larger and more diverse talent pool, enabling better innovation and operational efficiency.
Enhanced Technology Capabilities: Acquiring companies with advanced technology or intellectual property can strengthen the buyer’s competitive position and drive innovation.
Cost Synergies: By merging operations and optimizing resources, companies can achieve cost savings in purchasing, production, operating expenses and distribution.
Pitfalls
Acquisitions do not always lead to value creation; in fact, they can sometimes destroy value. You always want to minimize the risk of destroying value and it is therefore important to be known with some of the common pitfalls in advance of entering into an acquisition.
Misalignment on strategy and Management of the new combined company can lead to value destruction. Whereby post-acquisition the teams are not combining forces to work on the same goals, but are merely separated by unclear direction and vision for the future.
Lack of a good cultural fit is also a common pitfall and mostly overlooked between the acquiring and target companies. Mismatched cultures can lead to clashes in values, work styles, and communication, resulting in decreased employee morale and productivity.
Not adequately prepared for the integration process is another reason for failed acquisitions. This lack of preparation can result in delays, confusion, and inefficiencies, ultimately impacting the synergies and value creation expected from the deal.
Insufficient due diligence can also contribute to value destruction in acquisitions. If key issues such as financial health, legal risks, or operational challenges are overlooked during the due diligence process, the acquiring company may face unexpected hurdles post-acquisition, leading to value erosion.
Market conditions and industry dynamics can change post-acquisition, rendering the deal less valuable or even detrimental to the acquiring company's bottom line. For example, a shift in consumer preferences, technological disruptions, or regulatory changes can significantly impact the value proposition of the acquisition.
Overall, it is essential for companies engaging in acquisitions to carefully consider these factors to avoid value destruction and maximize the chances of successful integration and value creation.
Conclusion
We believe buy and build strategies can be value accretive for a lot of businesses, which is supported by succesfull entrepreneurs and private equity companies executing on these strategies. But it is equally important to understand the playing field, the forces at work and make sure you are well prepared. As we say at MAKE. “it is all about execution”.