How to Avoid the 6 Most Common Pitfalls of 'Add On' Acquisitions

An Article by Jay Lucas, Managing Partner

Given the high multiples and full prices being paid for ‘Platform Acquisitions,’ there has been a dramatic trend by private equity investors over the past 12 – 18 months to invest in ‘add on’ deals – and thus to some extent avoid the frothy market.

Moreover, given that such ‘add on’ transactions are typically in a familiar space, investors tend to view them as lower risk. 

However, while this would seem true at first glance – it is often not the case. In fact, there are some obvious ‘Big Pitfalls’ that need to be avoided as well as some ‘not so obvious’ ones that can derail progress and derail the value creation effort.

The Three Big Pitfalls

‘Business Model’ Fit: Does the ‘add on’ have the same or similar business model as the platform? In some cases, from the outside it may seem like two businesses in the same general industry would be a good fit. For instance, two marketers of sporting goods equipment – one to the baseball market and the other to football. However, if one is a direct marketer selling to consumers and the other operates as a ‘business to business’ provider, selling to teams or schools, then there are really very few synergies between the two and at best a poor or awkward fit in trying to combine the businesses and create value.

Branding/Customer Positioning: Here, the acquirer/investor needs to begin with a careful and accurate understanding of how its brand or positioning is perceived by the consumer. And, importantly, avoid either brand dilution or simply the creation of confusion in the mind of the customer. A high profile case study would be the series of transactions that muddied the prestigious reputation of the old Morgan Stanley – with the various combinations with Sears/Dean Witter, Smith Barney and several others. Too often, this also happens on a much smaller scale in the rush to complete ‘add on’s and prepare a company for exit.

Culture: While all other aspects can ‘look good on paper,’ if the two cultures are radically different – creating true value via an ‘add on’ can prove to be quite difficult. And, be a slow and resource draining process. For those many investors – who may not be of the ‘touchy, feely’ sensitive variety – this is a major, but easy to overlook pitfall to be avoided.

The Three Glaringly Obvious ‘Watch Outs’ – Hiding in Plain Sight 

Geography:  Simple as it sounds. Proximity is so much easier and more likely to work than longer distance deals.

Management:  Are both sets of management fully ‘on board’ for the transaction? Or is there some degree of ‘not invented here’ on one side or the other? Or even passive resistance?

Systems: How many ‘add on’s have ended up as a complete disaster due to the nightmarish problems of integrating disparate systems? Another one of those ‘watch out’s that can be readily diagnosed in advance.

Summary: Interestingly, in reviewing the above List – whether the Big Obvious Pitfalls – or the ‘Glaringly Obvious’ – the good news is that they are all easy to spot in advance. The real key is to be on the lookout. Not to let the urgency of the moment and the desire to ‘get on’ with the deal create a temporary blind spot and overlook the obvious flaw. Forewarned is forearmed – and hopefully, an alert vigilance will pave the way to a spate of successful ‘add on’ acquisitions going forward.

Jay Lucas is formerly a Partner at Bain & Company and the Chairman and Founder of The Lucas Group, a strategy consulting firm focused on the specialized needs of private equity investors and their portfolio companies.