Earlier this year, Mark Howard, partner and joint head of TMT at Charles Russell Speechlys, chaired an insightful panel session on buy and build strategies at the two-day TMT Finance M&A Forum held in London. We thought it would be useful to share some of the insights.
The buy and build panel comprised Peter Sweetbaum, CEO of award-winning IT Managed Service provider I.T. Lab, Matthew Parker, Group Sales Director of cloud computing specialist Iomart, Atul Monga, Corporate Finance Director at Grant Thornton and Ian Williams, Partner at Lyceum Capital.
The session explored a number of issues including the factors that underpin a successful buy and build strategy, criteria for a strong platform company, financing of add-ons and key pitfalls for management teams and PE sponsors.
A number of points were made during the interactive panel session, a few of which we summarise below:
- Buy and build strategies are often multi-faceted and can be devised around a number of opportunities including scalability, reseller capability, niche offerings, cross-selling opportunities, fragmentation and product/service offering "white space".
- In the course of its investment in Access, Lyceum supported 12 acquisitions of incremental IP alongside 6 reseller buyins, Ian noted.
- Having the right combination of factors, together with a capable management team, strong platform company and supportive PE sponsor, is the key to a successful strategy.
- Peter commented that for IT Lab key factors influencing its growth strategy include the pace and nature of clients' journies to the cloud and, in particular, a SaaS and app centric world and our ability to support this journey with incremental services.
- Key to a successful add-on is alignment on the future strategy of the combined business and being able to overcome any "...but we've always done it like this" mentality.
- Understanding the people you are buying, their motivations and the culture of an organisation can be critical to maximising opportunity and being able to implement change as well as weather any tough times that come along.
- A strong and capable management team with the right mix of skills and experience is key to a successful buy and build strategy and as the company scales up, new talent may be required.
- Coping effectively with growth, cultural change, conflicts of interest and management of equity are all important issues and risks for management teams. Dealing with them effectively necessitates open, honest and frank conversations as well as upfront planning, particularly around incentivisation pools and funding strategies.
- Key diligence issues for PE sponsors include asking does the management team have the right platform, the right experience, a number of potential opportunities and the ability to execute. Building a good partnership involves matching the right PE house with the right management team.
- Whilst a typical exit period is between three to five years, PE houses are currently seeing exit periods at the longer end of the range, with the average exit period being around four and a half years.
- Atul commented that some businesses better lend themselves to buy-and-build strategies than others – services providers often tend to be better suited than product providers simply given the greater likelihood of diversification or synergy upside.