Restructuring the Hold

Operational synergies. The new larger company will likely now have redundant resources, positioning management to pick and choose the necessary and best resources for its future, including facilities, equipment, systems, providers, and people. This is usually (at least in the near‐term) the most visible and sensitive effect of integration and requires particularly careful management to navigate successfully surprising for a company that learns to focus.

Scale economies. Economies of scale are a specific type of synergy related to a larger structure. With integration, the two companies can combine their two sets of spending and two sets of suppliers into single larger spend pool with a consolidated set of suppliers, enabling better partnerships and improved purchasing power.

Multiple accretion. Larger more established companies usually sell at higher multiples than smaller ones in the same industry. Multiple accretion occurs when a larger platform company, having for instance an expected exit multiple of 8x EBITDA, purchases a smaller add‐on company (say a $10 million EBITDA company at 6x). The new combined company is presumedly worth 8x, reflecting an immediate “multiple accretion” value of $20 million ($10m at 2x). Even better, multiple accretion applies not only to “purchased EBITDA” but to all future EBITDA growth from all add‐ons during the investment period.

When you consider all these factors, it's no wonder why private equity is so interested in add‐on acquisitions. But while add‐ons represent a fantastic potential source of investment period value creation, add‐ons should by no means be considered a slam‐dunk. Although add‐ons can represent one of the best value drivers of an investment period, they can also represent one of the biggest risks a PEG and portco team can undertake.

Integration Failure