Value creation demands flawless integration

Value creation demands flawless integration

Value creation witin PE companies and there integration is discribed in this article.

With abundant cash and fewer targets, private equity firms need to tread carefully.

PE funds are increasingly turning to large-scale M&A to solve what has become one of the industry’s most intractable problems—record amounts of money to spend and too few targets. GPs have put more money to work over the past five years than during any five-year period in the buyout industry’s history.

Still, dry powder, or uncalled capital, has soared 64% over the same period, setting new records annually and ramping up pressure on PE firms to accelerate the pace of dealmaking. One reason for the imbalance is hardly a bad problem: Beginning in 2014, enthusiastic investors have flooded buyout funds with more than $1 trillion in fresh capital. Another issue, however, poses a significant conundrum: PE firms are too often having to withdraw from auctions amid fierce competition from strategic corporate buyers, many of which have a decided advantage in bidding. Given that large and megabuyout funds of $1.5 billion or more hold two-thirds of the uncalled capital, chipping away at the mountain of dry powder will require more and bigger deals by the industry’s largest players (see Figure 2.6). Very large public-to-private transactions are on the rise for precisely this reason.

But increasingly, large funds are looking to win M&A deals by recreating the economics that corporate buyers enjoy. This involves using a platform company to hunt for large-scale merger partners that add strategic value through scale, do value creation, scope or both.

Large Scale M&A figure 2.6 integrationpeople.nl
Figure 2.6

Mega funds hold by far the largest share of dry powder, dialing up the pressure to do more multibillion-dollar deals. Making it all work, of course, is another matter. Large-scale, strategic M&A solves one problem for large PE firms by putting a lot of capital to work at once, but it also creates a major challenge: capturing value by integrating two or more complex organizations into a bigger one that makes strategic and operational sense. Bain research shows that, while there is clear value in making acquisitions large enough to have material impact on the acquirer, the success rate is uneven and correlates closely to buyer experience (see Figure 2.7).

The winners do this sort of deal relatively frequently and turn large-scale M&A into a repeatable buy and build model. The laggards make infrequent big bets, often in an attempt to swing for the fences strategically.