This is one of seven features of the private equity integration and value creation guidebook. Download the entire guidebook here.
Value creation is the point of every deal. Here are three ways private equity firms can make sure they begin creating value starting day one.
Build on the business case
Most private equity firms develop a solid business case for their acquisitions, including an in-depth industry analysis. Yet, all too often the business case is relegated to a filing cabinet once the deal closes. It’s important that private equity firms understand the acquisition in the context of the industry in order to determine where they’re best positioned to compete. This will drive value-creation decisions ranging from where to locate plants or other facilities, to which businesses to close or sell, to whether the company is even selling the right products.
It’s important that private equity firms understand the acquisition in the context of the industry.
For example: One private equity owned company operated for the first two years post-acquisition in a mature geographic location while much of the market growth was in regions over 1,000 miles away. This led to stagnant growth and the company’s having to scramble to build a new facility, which took an additional year.
Look for synergies across the portfolio
While private equity firms own multiple companies, when it comes to creating an integration strategy for a single acquisition, they’re so focused on making fixes that they can overlook opportunities to leverage capabilities or achieve economies of scale across their entire portfolio. Taking a step back from this myopic perspective can lead to some surprising discoveries. It’s possible that functional experts (either third parties or those residents in other portfolio companies) may have already solved some of the same issues the new company is currently facing, or they may have discovered opportunities for synergies. In a recent instance, a private equity firm owned several similar manufacturers, all of which were buying comparable components from more than 40 suppliers. The firm undertook a purchasing consolidation effort and was able to reduce the number of suppliers to six, resulting in cost savings and greater supply chain efficiency.
What to consider when designing your post-acquisition plan:
- Consolidation opportunities - Are there consolidation opportunities in terms of plants or other facilities?
- Core capabilities - What core capabilities and resources will be essential for strong financial returns?
- Divestitures - What can we divest that’s not adding value?
- Opportunities - Are there opportunities to enhance material costs or gain economies of scale by joining purchasing with other portfolio companies?
- Best practices - What lessons learned or best practices can we deploy across the portfolio?
- Cross-selling - Are there any cross-selling opportunities?
If you wait, you may find that the window for value creation has already slammed shut.
Private equity firms use value as a lens for making a purchase, yet many are content to focus on “business as usual” for the first 100 days or longer rather than implementing changes right away. That could be a mistake: If you wait, you may find that the window for value creation has already slammed shut.