September 14, 2015
Interviewed by: David Snow
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After the Add-on, Then What?

In the private equity buy-and-build strategy, post-merger integration can be a huge challenge. Experts from One Equity Partners, Audax Private Equity, and RSM share what the top areas of trouble are, and how the best PE firms deal with them.

In the private equity buy-and-build strategy, post-merger integration can be a huge challenge. Experts from One Equity Partners, Audax Private Equity, and RSM share what the top areas of trouble are, and how the best PE firms deal with them.

After the Add-on, Then What?
Inside the Buy-and-Build Strategy

David Snow, Privcap: Today, we’re joined by Jay Jester of Audax Private Equity, Dennis Cail of RSM, and Greg Belinfanti of One Equity Partners. Gentlemen, welcome to Privcap. Thanks for being here.

Unison: Thank you.

Snow: What happens after you’ve acquired an add-on or a series of add-ons? They’re now plugged into the platform company and now comes the hard work of actually making sure these companies hum. They get along, they are integrating. Dennis, talk about some areas where things can go wrong without proper planning.

Dennis Cail, RSM: The IT piece is typically the most costly portion of any acquisition integration effort, right? So, we put a lot of emphasis and we bring a lot of skillsets to the table to help companies avoid those risks. And really we try to focus on helping them avoid a lift-and-shift approach, if you will, or a buy-and-hold approach.

Some of our clients have learned the hard way that buying a company and waiting to optimize that business or integrate that business doesn’t necessarily work well for a number of different reasons.

Typically, what you see with add-on companies is they have their own set of IT back-office systems and ERP systems. The platform company has its own system and typically the goal is to do a tuckin, if you will, and bring that company over into that platform system. That works roughly 80% of the time but typically there is some application or process that’s unique to that add-on company that the platform company needs to account for.

Snow: Jay, what have you seen as some of the more challenging aspects of integrating add-ons with the platform company?

Jay Jester, Audax Private Equity: I think the most complex part of it is almost always on the human side. How are you getting these organizations and people to work together? You can get the vision on paper, but the people who actually have to execute—that’s one of the biggest challenges. My dad’s line was, “The best fertilizer is the farmer’s footfalls.” I think a lot of private equity firms make the mistake of dropping into the cadence of the 90-day board meeting and with three months out—with all the different challenges facing a company—if you’re not setting weekly and monthly goals and driven by a tried and tested checklist of what needs to get done. We’ve seen this over and over again.

Snow: Greg, as a prodigious combiner of companies, what has One Equity found to be among the more challenging aspects of integration?

Greg Belinfanti, One Equity Partners: Where you’re buying things because they seem logical but don’t really have a full understanding of the end market, we spend a lot of time trying to understand the end market and how the end market is going to view the combination of these two companies. That, I think, isa huge watch-out.

For example, we just bought a laboratory glass producer in Germany. Now, it was originally owned by Shot Glass, which is a large industrial glass manufacturer. It seems like a guy who makes industrial glass should also own a company that makes laboratory glass. But they sell to a completely different end market. One is high-volume, long-run selling into distribution into…IKEA. The other is smaller volumes selling into very, very targeted laboratory products companies (laboratory distribution), so while they seem like logical buyers, they’re not logical at all. They’re ships passing in the night.

Jester: The big disasters everybody sees and you see from a distance. But it’s the little things that you want to catch early. Your best employees starting to take jobs elsewhere right after—“Whoa, wait a minute. We thought you were part of the team.”

One of your biggest customers starts reducing their orders, starts fading away on you out of left field. That type of thing you need to see and it’s not always that huge customer goes completely away. It’s those small, quiet complaints that start adding up. They can be signs of an integration that’s not going well.

Belinfanti: I think the other thing is really diving into what management is telling you. We have a saying: “Anecdotes and averages will kill you.” Andnobody likes to give you bad news. And when they give you bad news, they’ll give it to you with an anecdote that tells you this is going to give you an average. I mean, your CEO will say something like, “We’ve got a 97% fulfill rate.” That means you’re sending back 30 of every customer. So, anecdotes and averages will kill you and you’ve really got to dive into that—particularly as you’re in the process of doing these integrations—and try to bring these companies together.

Cail: If that CEO does not have that acquisition-integration experience, change-management experience, governance experience or transparency experience in terms of reporting to the board—especially when it comes to bad news—things go bad and they go bad quickly. It’s like my grandfather used to say, “Bad news never gets better with time.” So, the sooner you can get that information out there, the better everyone can come together and figure out how best to solve that issue. So, I would say really encouraging transparency on the front end is a key to success across the board.

Snow: Since your firm does a lot of work in IT, what are some common trouble signals when an IT integration is not going as hoped or as planned?

Cail: The first sign is when it really doesn’t happen at all—when we have a client or a PE firm that says, “Look, we’re just going to leave those guys on their system.”

They’re going to send us a spreadsheet every month and we’ll just take it from there. That never works: (a) because spreadsheets can be modified, so there’s no internal—you don’t have that true visibility into the performance of that system. And (b) it is just a very obsolete way of doing business, especially if you have a platform company or even a host of companies that are reporting up to you. You don’t want to be managing spreadsheets. You don’t want to be in that business. So, I would say just really putting strong emphasis on integrating those companies.

Snow: Any other cautionary stories to tellfrom your years of combining companies? Jay?

Jester: I think it can be really tempting to go do an add-on acquisition just for the sake of making the company bigger. There are firms that have figured out how to walk through the checklist and figure out the right deals to chase and how to get them integrated. I think there are a lot of firms out there that are doing add-on acquisitions for the sake of making bigger companies.

Belinfanti: There are times where you have to say “No.” There are times where just the deal’s not right because of the price, because of time or because of cultural issues. We did a deal in the third-party benefit space where we spent eight months trying to build a relationship with a guy who had a family-owned business. We were going to buy his business. Everything seemed perfect, but we got in and the working capital situation wasn’t right. And…we’re in the deal business and we want to do deals.

Snow: It’s hard to walk away from something you put that much work in.

Belinfanti: It’s hard to walk away. But there are times where you’ve got to walk away. Its just not the right company, not the right time, not the right price.

How does your firm help private equity firms succeed in combining and integrating portfolio companies?

Cail: We start by setting up the integration management office. We want to create a very detailed integration plan to make that happen. Then, we focus on identifying all the key business processes from end to end, which includes coming up with the functional and technical specifications.

We have a proven framework and methodology that’s been tweaked and test time and time again.

Beyond integration management, how else does RSM work with PE firms?

Cail: We actually offer a range of services. In fact, RSM is the only firm within this space that offers financial advisory services, risk advisory services, and technology and management consulting. All these things are important because that means we can be involved, and we are involved, throughout the life cycle of that fund and making sure the companies within their portfolio are successful.

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