An Interim Report on "Buy-and-Build"

On several occasions we have already mentioned that we expect a lot from the “buy-and-build” strategy of some of our portfolio companies. By "buy-and-build", we understand the continued acquisition of similar, not-too-large companies at favorable valuations to form a market leader. 

Why does the buy-and-build strategy work for some and not for others? Prerequisites for success are a fragmented market with many acquisition opportunities, well-established management and a strong culture that appeals to "newcomers". Experience shows us that service markets are easier to consolidate than manufacturing industries. The integration of production sites is usually more difficult, lengthy and, above all, more expensive than expected.

Prerequisites for success are a fragmented market with many acquisition opportunities, well-established management and a strong culture that appeals to "newcomers".

Attractiveness for the investor: Two factors contribute significantly to the financial success of a buy-and-build strategy. The first reason is that the acquired company achieves a margin improvement. This is mainly implemented in higher-level areas such as procurement, IT, finance and human resources. A second reason is that the acquired company is valued more favorably because it is private and relatively small. As a result of continuing acquisitions, profit growth can be achieved even in moderately growing markets, which would hardly be possible relying solely on organic growth.

Did you know?: Even the harshest winter is afraid of spring. (Finish Proverb)

This is an excerpt from Carnot Capital's commentary published on the 4th of March 2019, of which the full version can be accessed here.