June 15, 2018
Interviewed by: David Snow
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Add-ons Require ‘M&A Muscle’

Private equity firms that add value through add-ons are good at helping their portfolio companies build ‘M&A muscle,’ meaning they help their management teams to step up to the complex tasks of integrating two companies into a synergistic platform. In part one of the thought-leadership series “Post-Merger Integration,” learn from three experts about how to plan and communicate around the strategic vision of add-ons.

Private equity firms that add value through add-ons are good at helping their portfolio companies build ‘M&A muscle,’ meaning they help their management teams to step up to the complex tasks of integrating two companies into a synergistic platform. In part one of the thought-leadership series “Post-Merger Integration,” learn from three experts about how to plan and communicate around the strategic vision of add-ons.

Add-Ons Require ‘M&A Muscle’

David Snow, Privcap:
Today we’re joined by Kevin Masse of TA Associates, Tom Anderson of the Riverside Company, and Gavin Backos of RSM. gentlemen welcome to Privcap today, thanks for being here.

Unison: Thank You.

Snow: So we’re talking about a very important topic in private equity today, and that is the integration of portfolio companies. We seem to find ourselves in a golden era for private equity add-ons, and yet when you combine two portfolio companies you can’t just slap them together and hope for the best. There’s a lot of care and a lot of thought that goes into it. Why is this such an important strategy for adding value?

Tom Anderson, The Riverside Company:
In the last half decade we’ve done a 165 bolt-ons, so if you do the math over five-year period that’s about three-ish a month, which is an amazing pace for a portfolio of our size. There’s a couple of things driving it from a TA perspective. One, is it’s an incredible way for us to do industry deep dives. We use M&A as a way to accelerate our organic growth plan by back-filling with some really cool M&A activity, so it gives us an opportunity to a couple of things. One, identify and potentially acquire cool technology, and/or capability sets for our portfolio companies.

There’s also a neat way for us to chief synergies really quickly, and so in our business what we’re trying to identify cool technologies, cool businesses with great business models and then plugging in play with our existing companies, flexing that muscle allowing that integration happens seamlessly and successfully has proven to be quite valuable for our companies.

Anderson: The small bolt-on or the add-ons are usually more affordable, so we can buy them at a lower multiple than the platform that they that we originally bought. So, the more add-ons that we can do and add into the platform, the bigger and better the company is and then we can sell it at the higher multiple of the platform.

Gavin Backos, RSM:
Pre-planning is a precursor to well-orchestrated integration. Making sure that we have stakeholder commitment from both parties, engagement from both parties, and not just ink on paper, but actual involvement in integration to make sure that things go well is a key attribute to lasting success.

Snow: When you’re looking at a target company for a potential add-on, what are you looking at? What kinds of signals are you looking for to ensure that, actually, the synergies are going to be real when you combine it with a parent company?

Kevin Masse, TA Associates:
Actually, before we even close on the initial investment, there’s an M&A strategy that’s already been developed, right? So we’ve canvassed the market. We’ve assessed businesses that we think are fit for purpose for us from an acquisition perspective, and we do that in collaboration partnership with our management teams, and that’s really important. So we’ve got alignment with our management teams, we’ve got alignment at the board level around, “what’s our M&A strategy look like?,” “what are we driving to, that eventual outcome?” So are we looking for geographic expansion, are we looking for product and technology capabilities, are we looking frankly for additional bandwidth at the management level, right? And that’s anything about TA we’re a little bit different in terms of how we source our initial investments, most of it, almost nearly all of it, we try at least, to source ourselves, independent of third parties, intermediaries, and so on. And so that engine of sourcing acquisitions, we then bring to bear for our portfolio companies.

Anderson: We find that there’s three sources of value that we look for as we look at integration. One is the commercial gaps that one of the legacy companies might have that can be filled by the other.

It’s either markets, geographies, customers or what have you. The second one is in some synergy on the cost side, so oftentimes will have overhead costs that we can take out, and then the third would be best practices. So a lot of times we’ll buy a company that will have specific practices that can be leveraged across the platform company.

Snow: What about estimating the cost savings from synergies by combining IT platforms? Is that something that can be estimated and how do you do that?

Anderson: I’d say that’s the easiest one to estimate, but we almost always will overestimate it so I like to have a range of an estimate. So for any functional area, any cost savings area to ever have a low, a high, and a likely, and that’s the way you do your modeling, and that’s what you target with the management teams once we buy the company.

Backos: That synergy model needs to be established right up front, and you need to know what you’re heading into. And I think that they need to be organization operationally around the teams that are involved in that integration to know where these synergies are going to fall from.

Masse: The neat thing for us is when our management teams can actually start to identify the surgeries even before we start to get involved. So we build that solid foundation from a systems, process, people perspective, so that as the management teams of our portfolio companies are asked to start to evaluate M&A targets in the marketplace, not only they have confidence that they can get it done but that they can integrate successfully. Most importantly, they’re starting to see how they can leverage the scale of their existing business, to start to identify those synergies. So although we very rarely will do deals based on just synergies alone, there’s got to be a strategic driver to the decision-making. Those synergies help de-risk the investment and most importantly as we’re trying to scale organic in M&A-acquired, EBITDA growth in our portfolios and revenue growth, having those synergies is just an additional layer of value creation starts and become really critical.

Snow: Let’s talk a bit about what might be called the countdown to day one: the planning process that takes place in advance of two companies getting combined.

Backos: The plan actually starts well in advance of day one, and it’s critical that it does. The most successful integrations I’ve been with are probably, if you go day one minus 30, day one minus 45. That’s where the planning starts. What’s important is to understand what’s critical. What is that continuity plan for day one? How do these companies coexist at day one without burdening the organization, and how do we support finance and bring IT along so that the first month’s close is reasonable, manageable, and gets the job done?

Anderson: The plan is so important, and one thing that I like to do is to separate the thought process on the plan, as first integration and optimization, because if you try to plan everything on the integration upfront and foresee everything you’re going to need to do, the planning will get unwieldy. And so if we focus first integration on what has to be done the day that we integrate the company, it’s primarily things around communication, around leadership, around roles and responsibilities and reporting. And once we get those integrated then you can move on to optimization. Optimization can take a little more time.

Masse: Before you even start to get into the tactical part of the plan, make sure there’s good alignment, not only with management, but your stakeholders, meaning your board members, around the strategic drivers of, “why are we doing this deal?” Very rarely is it going to be financial engineering, right? It’s going to be, “hey, I love their customer base, I want their product, their next gen technology,” maybe it’s a combination of factors. Let’s make sure we have good alignment, and then from there your tactical steps around a successful integration then naturally happens.

Anderson: I’d take that one step further and say that down to the employee level as well, because so much of the communication that happens around integration happens at that employee level from one company to another, whether it’s a customer, or the vendor, or what have you, and you have to have the employee has to be excited about the merger or the integration.

Masse: We say win the hearts and minds. That’s exactly right.

Snow: Ultimately the responsibility for integrating the two portfolio companies falls to the CEO, but the CEO has a day job running the company. Is there a risk that, by placing too much of the burden of the integration on the shoulders of the CEO, that the company falls off the rails?

Anderson: I’ll often have this conversation with our executives. I mean, look down the hallway. There’s not a bunch of consultants and experts similar to Gavin here, who can just parachute in, who are readily available amongst your ranks. You’re right. Everyone has a day job, so how do you ensure that you’ve got the internal bandwidth to successfully integrate a business, while ensuring that there’s no degradation the performance of your existing business? Again, we call it ‘M&A muscle,’ its building that that systematic playbook, it’s a successfully integrating businesses. That’s something that is not episodic. We believe it can be systematized, and we try to build that within our management teams.

We try to augment our management teams, but we also use third-party advisers successfully to come in particularly some of those tactical areas, whether it’s HR, systems, financial reporting, systems integration. We feel like we get a ton of leverage out of third-party advisers when appropriate for those types of integration needs.

Backos: A lot of what we do with our clients is we’ll advise them out the gates on an initial integration plan, operating model, whatever you call it. But the playbook needs to remain behind, and handle for the playbook is a critical component of the advice that we provide. Being able to build that internal muscle around the next integration and understanding how the teams need work together is a key to leave behind I think is critical.

Anderson: It really needs to be the CEO. Absolutely has got to lead the integration. It’s not the private equity firm, it’s not the consulting, it’s the CEO — they must lead it, and then typically it works great when you have a CEO with a key lieutenant, and the CEO is leading the vision, and the communication, and making sure everybody knows why this is so exciting to do.

Backos: The only thing I’d add to that from a lieutenant, I would say two lieutenants from our side, I like that finance and IT have their own lieutenants, and because once you start mudding those waters I think it gets a little gray.

Anderson: In each of the functional areas might have a lieutenant themselves, so you say finance an IT, but you might say if there’s a sales and marketing leader, that person is leaving day-to-day business and he or she might have their second in charge that’s focusing on the integration, because if everybody is doing a part-time job, nobody’s that getting anything done and so you have to have people focused.

Snow: Let’s take a deeper dive into the very critical topic of communications. You have all these stakeholders, you’ve got your investors, your employees, your customers, your investors’ investors. How do you manage communications during the integration?

Anderson: You have to communicate early, and communicate often, and over-communicate with each of your stakeholders, customers, vendors, and really, the employees, as we were talking before the employees are so important to make sure they understand the vision. And the customers and suppliers to understand why you’re doing it and why it makes sense for the company, and why it’s going to ultimately good be good for them.

Masse: The articulation of that strategic vision: “Here’s why we’re doing the deal, here’s why we’re really excited to have you join the business,” is critical.

Anderson: And the message will be multiple messages that you create early so they’re ready on day one. You’ll have communication memos, you’ll have releases, you’ll have talking points that everybody will use with either the customer or the suppliers.

Backos: When we get to day one I think everyone involved in that integration from the executive office all the way down to the folks have a role or an intersection in play of how their communications going to unfold. What their target audience is, what the form of medium is, and who’s going to present, deliver it, et cetera. So, I think just to ratify that call, that’s done well up front.

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