Karl Roberts and Arun
Lamba of Portage Point Partners share their perspectives on
middle market consolidations.
CHICAGO, May 6, 2024
/PRNewswire/ -- Private Equity (PE) firms understand the value of a
well-engineered consolidation or roll-up strategy to generate
synergies and rapidly drive higher investment returns. However,
increasing competition for deals and relatively high interest rates
are disrupting the current acquisition environment, raising the
value creation threshold for consolidation strategies. In response,
middle market PE firms, in particular, are becoming more creative
and pursuing more consolidations between adjacent1
businesses, often creating much greater execution risk.
As adjacent roll-up strategies struggle to generate expected
enterprise value, PE firms are increasingly experiencing delayed or
even unrealized synergy capture and tighter-than-expected
liquidity. There are three primary drivers behind this trend that
PE firms should address to realize value creation objectives.
1. Adjacent Industry Consolidation Synergies Are More
Complex
Consolidations between like-players within an industry can
enable economies of skill and scale, enhance network efficiencies
and create better upstream and downstream leverage. The five most
typical value creation levers, listed in the table below, are
important potential value drivers. However, the further a target
add-on company is from directly overlapping with the core platform
company sector, the more difficult it can be to achieve or sustain
value creating synergies.
Cross-selling synergies, in particular, can be especially tough
to realize – yet are frequently cited as a primary roll-up value
driver. There is a natural attraction to leveraging combined
customer bases, increasing basket size and increasing strategic
relevance with enterprise customers. However, there are a number of
strategic and tactical factors that make cross-sell value creation
difficult to achieve – and they are often overlooked.
These barriers include:
- Business unit or P&L structure differences that
obscure accountability and incentives
- Lack of governance / tactical coordination between the various
entities, including misaligned commission structures
- Segmented customer / sales force structures that are difficult
to reconcile
- Insufficient cross-training of personnel on new / revised
offerings and paths to market
- Customer indifference / lack of acceptance /
lack of buying coordination among categories
- Increased market rivalry as competitors look to take advantage
of transition
Companies that successfully address these cross-selling
challenges generally undertake a comprehensive, coordinated effort
to first develop a new go-to-market strategy, then realign the
commercial organization and develop new tactical governance to
fully capture the opportunity. This can be especially difficult for
adjacent consolidation plays – and the further the core platform
companies are from a direct overlap, the more challenging it is to
realize cross-selling synergies.
2. Lack of Data Transparency
Integrating IT systems is critical for roll up effectiveness and
scalability, however the process can be long, cumbersome and
fraught with risk – at times even impairing the combined company's
ability to operate properly. As a result, a large portion of the
investment hold period can elapse with unoptimized processes and
lack of data transparency. This makes it difficult-to-impossible to
establish a single version of truth and accurately identify and
report on value creation. Companies and investors face several
hurdles to data integration.
- Lack of 'apples-to-apples' financials
- Excessive time lags in reporting
- Fundamental data / alignment errors
- Lack of visibility into liquidity and connection to
operational KPIs / drivers
- Ad hoc, inconsistent one-off reports
- Inability to trace synergy capture by target action or even
recognize there is an issue
- Constant need for repetitive manual efforts to consistently
reconcile differences
Companies that successfully overcome these challenges (i) commit
to tracking a limited set of defined key metrics, (ii) instigate
near real-time reporting to provide interim transparency, often
built on data warehousing and business intelligence (BI) tools and
(iii) adopt optimized business processes along with supportive IT
systems changes.
3. Limited Bandwidth of Management Teams Inhibits Ability TO
DRIVE Comprehensive Change
Management teams, especially lean ones, often lack the bandwidth
to address three critical, interrelated priorities at the same
time: (i) run the day-to-day business, (ii) combine / change the
operating paradigms and (iii) drive synergy capture. Management
teams of the core platform companies are usually fully occupied
running the day-to-day and often do not become involved in the
integration process until the deal is nearly closed, leaving them
minimal time to develop thoughtful integration plans. As a result,
they quickly find themselves overwhelmed with a sharp increase in
workload and little-to-no support to execute. Plus, the difficulty
of the work is often compounded due to four general factors.
- Step-change in Complexity
Sudden increase in the number of systems, processes and personnel
that must be managed, making it harder to objectively evaluate
risks, opportunities, performance drivers and talent
- Rise in Organic Problem Solving
Well-intended people in both organizations will organically fill in
the gaps where processes and roles are undefined. This often
creates inefficiencies, conflicts and strategic misalignments that
quickly multiply
- Shifts in Go-to-Market Dynamics
Adjacent acquisitions may necessitate a transformative change in
go-to-market dynamics to address customer, distributor or other
channel concerns
- Changes in Management Alignment
Consolidations may drive entirely new organizational dynamics,
making it more difficult to cascade direction and information in
real time and without mistakes / confusion / conflicts
To meaningfully change the operating paradigm, successful
management teams should establish and empower a defined integration
management office (IMO) that facilitates coordinated efforts and
drives strategic and operational alignments from transaction
initiation to close and through value capture. The IMO can then
work across functions to provide the necessary structure and
catalyst for action to overcome the aforementioned barriers.
At Portage Point, we partner with clients to develop and
implement successful middle market consolidation roadmaps. Our
seasoned team – comprising former owners, operators, strategists
and investors – brings a unique situational lens and deep
implementation bias. We rapidly identify opportunities / risks and
collaborate closely with investors / management teams to drive
timely, comprehensive value capture and risk mitigation. Together,
we unlock value and propel successful integrations.
To learn more about how Portage Point can provide critical
support to middle market investors, owners and operators, please
visit www.portagepointpartners.com.
1 "Adjacent" here is defined as
some-to-limited degree of overlap in one or more of several key
areas:
- Product / service offerings
- Customer bases
- Manufacturing models
- Delivery models
- Regions served
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SOURCE Portage Point Partners