(Charlotte, NC – May 30, 2018)
In this six-part newsletter series, we highlight key practices that private equity investors put in place during the M&A process and address ways in which strategic buyers can borrow and/or adapt these practices to create value through acquisitions. This week we will look at the fourth key practice: experienced in the upgrade.
Private Equity (“PE”) firms seek to identify opportunities at target companies where they can create value by implementing various “upgrades”, the most significant being operational improvement. (2) Ernst & Young estimates that operational improvements represent approximately 50% of value creation in PE owned companies. (4) The success of PE is rarely based on unique or original upgrades, but rather on the acumen, discipline, resources, urgency, and transformational agenda brought to an acquired company. Eliminating the “business as usual” mindset – by shaking up priorities, organizational structure, or governance – is the key ingredient for PE. (2)
Possible upgrades include sourcing cost reduction, product cost down, manufacturing improvement, overhead reduction, pricing enhancements, information technology value creation, etc. (2) Each upgrade has the potential to deliver different levels of value creation. For example, an IT system upgrade, while critical for business operations and maintenance of competitiveness, will act to preserve rather than enhance value; increasing sales force effectiveness can be immediately value accretive. (3) PE is very selective, choosing to concentrate on three or four areas for improvement at any one time.(3) Due diligence may have identified areas with particularly high potential for operational improvement, which are likely to be a first focus post acquisition. (3)
Many PE firms opt to install new leadership structures into portfolio companies and install big-scale performance improvement projects. (4) PE firms are honing their leadership assessment skills, learning to identify the right team early, and filling roles with fit-for-purpose talent from the C-suite to the front line. (1) In certain instances, a PE will bring in a new, proven CEO to install upgrades and, other times, will rely on existing management to follow the PE playbook.
Corporate buyers can borrow from this key practice by seeking opportunities to install any “upgrades” into their own diligence process and integration plan. Corporate buyers could also have a more robust list of upgrades they have ascertained from operating their own business. It is noteworthy that PE firms take a disciplined and focused approach to implementing upgrades shortly following acquisition. Corporate buyers should also follow this practice to reap the benefits of an acquisition without delay.
(1) Bain & Company, Inc.: Global Private Equity Report 2018
(2) Oliver Wyman: Adopting Private Equity’s Playbook – Rapid EBITDA Improvement
(3) Insead: Operational Improvement the Private Equity Way
(4) Ernst & Young: A harder look at value creation by private equity – 2016
“North Inlet Advisors, LLC” provides financial advice to companies on capital formation, mergers, acquisitions, divestitures, restructurings, and other complex corporate transactions. North Inlet Advisors is not a retail broker-dealer, does not conduct underwriting activities, provide research, analyst reports, or solicit or carry accounts, or offer or sell securities products to retail customers. North Inlet Advisors is registered as a broker-dealer with the U.S. Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority (“FINRA”) and Securities Investor Protection Corporation (“SIPC”). Please visit www.finra.org and www.sipc.org, or North Inlet’s regulatory webpage for more information.