Buy-and-build strategy: M&A-driven growth and value enhancement

published on 22 August 2023 | reading time approx. 3 minutes

The buy-and-build strategy is a popular M&A strategy to accelerate the growth of a company and significantly enhance its value. Through targeted acquisition and integration of multiple companies in highly fragmented markets, investors can achieve a higher value and return. Successful implementation requires a careful selection of the targets and an effective post-merger integration. In this process, the integration of various company areas, such as procurement, administration, and branding, plays a key role. A well-integrated corporate group is more attractive to potential buyers and adds to sustainable success. The success of the buy-and-build strategy depends on market conditions, investors’ experience, and strategic implementation.

The buy-and-build strategy is proving to be an increasingly popular M&A strategy with the potential to accelerate growth of a company and significantly enhance its value. In this article, we dive deeper into the inner workings of this strategy and discuss key components, challenges and success factors on the road to effective implementation.

Buy-and-build strategy: A growing trend in the M&A market

The buy-and-build strategy is becoming an increasingly dominant force in the M&A market. It involves the targeted acquisition and integration of several complementary companies. The aim is to consolidate strongly fragmented markets and thus achieve a premium value at exit. An important mechanism, which adds to that premium value, is “Multiple Arbitrage”. The main idea behind multiple arbitrage is that smaller companies are usually traded with lower valuation multiples than larger companies. By buying smaller companies and integrating them into a larger entity, investors can increase the average valuation multiplier of the consolidated company and thus achieve a higher value at exit. Within 10 years (2012-2022), the share of buy and build acquisitions, relative to the total number of M&A transactions, more than doubled and increased from the erstwhile 6% to 15%.

The buy-and-build approach often starts with buying a platform company and then acquiring further companies.

Prerequisites and key factors for a successful buy-and-build strategy

A market perfect for buy-and-build strategies is highly fragmented and characterised by a very rapid growth rate. In addition, the selection of the targets plays a crucial role. Here, it is advisable to, first of all, acquire successful and healthy companies to avoid profitability dilution and to boost revenue growth.

Enhancing value through a buy-and-build strategy

Buy-and-build strategies help achieve, on average, higher internal rates of return compared to standalone investments made by private equity (PE) companies. Such standalone investments are about buying a single company without planning a targeted acquisition of any other firms to scale or consolidate. The higher return that buy-and-build strategies offer is achieved primarily through revenue growth and higher margins. Here, both the acquisition process (“buy”) and the subsequent integration and scaling of the business (“build”) play an equally important role. It is, however, very important to be aware that too high a valuation, both at the stage of acquiring the platform company and when buying the other companies, involves the risk of the buy-and-build strategy going amiss. This could happen, for example, if the valuation does not match the actual performance or synergy potential of the acquired company, resulting in the financial burden outweighing the value of the strategic advantages.

Significance of the post-merger integration

The speed of integration, management, and cultural adaptation are crucial factors for successful post-merger integration. A comprehensive integration process should take into account various areas of the company such as procurement, administration, or branding. Procurement can be scaled to achieve cost efficiencies, administration can be harmonised to avoid duplication of work, and consistent branding can help strengthen the market presence and achieve marketing synergies. It is crucial to ensure the cultural fit between the parties and to carry out the integration quickly. A lengthy integration process may have a negative impact on employee satisfaction and inhibit the progress of the newly formed company. In addition to the operational advantages, it is easier for financial investors to sell a well-integrated group than a combination of non-integrated companies. Effective integration can also help enhance the general value of the company for potential buyers and increase the attractiveness of the company in the event of an exit.

Conclusion

The buy-and-build strategy is a powerful tool for companies to accelerate their growth and increase their enterprise value. It enables companies to strengthen their market position, exploit synergies and increase their enterprise value. Careful strategic planning, thorough due diligence and effective integration are crucial. Companies that successfully implement this strategy can create significant (added) value for their shareholders and strengthen their competitive position. However, it is important to be aware that the success of this strategy depends on specific market conditions and the experience of the investor and management. However, with the right strategy and implementation, the buy-and-build strategy can lead to sustainable success, long-term competitive advantages, and higher sales returns.