Buy & Build

This month, we participated in an event organized by the M&A Community of House of Executives. It was a great opportunity to explore the world of Buy and Build—a growth strategy aimed at acquiring a platform company and expanding it through a series of acquisitions to achieve greater scale within a few years. Professionals from the private equity sector and various industries shared their experiences in leading these processes.

While there seems to be a straightforward process to carry out this strategy—from deal sourcing to due diligence and integration—the approach to value creation varies significantly among professionals. Some focus solely on cost-saving initiatives as the primary driver of their strategy, while others emphasize revenue enhancement opportunities, such as cross-selling or upselling. Both approaches are quantified and incorporated into the acquisition thesis. This, of course, constitutes the theoretical framework—but it’s a framework with its own expectations and objectives. The true challenge lies in the integration, where the real work happens.

Many studies have shown that acquisitions have a poor track record of achieving their desired outcomes. This can often be attributed to unrealistic objectives, poorly executed integrations, or a combination of both. Ultimately, an acquisition represents a disruptive change to an established business with its own structure and culture, which follows what we call path dependency—a path that can be highly advantageous. However, acquisitions disrupt this equilibrium, requiring significant effort to forge a new path toward realizing the desired vision. This process begins with decisions about the type of integration to pursue and continues throughout the integration itself.

Some businesses opt for aggressive integrations, focusing on reducing costs—mainly fixed costs. Those who follow this approach often select targets that align with this specific integration strategy. For example, one private equity professional at the event highlighted how they target one specific sector with a clear cost-cutting initiative in mind. Others, however, tailor their integration strategies to fit the industry and, more importantly, their own operational approach and assumptions. Similarly, organizational structures—whether centralized or decentralized—vary depending on the market, customer base, brand equity, and long-term vision.

At the end of the day, it’s a risk-reward game, and the formula is unique to each business. Even within the same company, a new add-on acquisition might require adjustments to the integration strategy. This is something Ted Clark experienced first-hand in building a $650 million business, starting with a $35 million platform company*. In a previous article, I introduced the concept of the convex deal—where the downside is capped, and the upside remains open, allowing businesses to reap the benefits of future unknown dynamics. Taking the opposite approach could jeopardize the success of the operation.

The event made it clear that, even in a seemingly straightforward Buy and Build strategy—characterized initially by an aggressive approach—there is no one-size-fits-all formula for generating value. It all depends. Initial integration plans should be adaptive and evolutionary. Leaders must continuously assess their targets, evaluate integration dynamics, and remain open to changing their course of action when necessary. Creating value through scale demands informed, flexible, and sometimes hybrid strategies that leverage the potential of sequential acquisitions in an increasingly complex and uncertain world.

* Clark. T (2022). Buy & build CEO: Leveraging Private Equity to Build a Winning Global Business. Dudley Court Press.

Energy Transition, an Investment Opportunity

During this month, we joined two events in Brussels addressing the issue of energy. The first was the Energy Transition Congress organized by Techlink, a trade association for manufacturers, distributers and installers of energy solutions, ODE (Organisatie Duurzame Energie Vlaanderen), a Flemish trade association for renewable energy, and EDORA a French-speaking trade association for products and services related to the energy transition. The other event represented the second meet-up of BeClimate, a young and burgeoning ecosystem of startups, companies, academics, and investors. As outsiders, we seized the opportunity to delve into the energy ecosystem and comprehend the dynamics of a sector facing significant pressure due to climate change issues and recent geopolitical turmoil.

As industry experts illuminated the current state of the sector, we couldn't help but notice the complexity of different moving parts, each attempting to navigate the wave of electrification, decarbonization, and energy efficiency. Many express concerns about the lack of boldness among policymakers to instigate forceful top-down changes, from international climate conferences (COP) to local governments. Others point out practical issues related to technologies and their implementation. For instance, heat pumps are not widely used in Belgium compared to other European countries. Simultaneously, the local market grapples with a shortage of qualified technicians to maintain such installations, which, when widely deployed, can also lead to disturbances. Moreover, it appears that energy technologies evolve rapidly, and unfortunately, technician training and qualifications do not always keep pace. Thermal networks, widely utilized in the Nordics to collect and transport heat from production facilities to consumption sites, require substantial infrastructure investments. In summary, external and internal pressures create a highly dynamic environment in the energy sector, rightly characterized as a transition.

This transitional phase perfectly fits the description of a complex system in a state of high non-equilibrium, shifting toward a new, hard-to-define state. The transition is marked by instability, with things more volatile than the "normal." It reacts to internal and external factors applying forces that, through feedback loop mechanisms, reinforce the change and transition. As with any complex system, the sector is subject to non-linearity, where small changes can have a significant effect, eventually leading to a tipping point toward the new state, making it challenging to predict.

Amid all this, how can an investor benefit from a very dynamic sector while managing the volatility risk, which most likely would lead to a winner-take-all effect, especially when the new state towards which the transition is leading is unknown?

Investment can occur at the technology level, whether centralized or decentralized. However, these technologies are numerous, and the rate of change is accelerating, making it challenging to bet on a single technology. Heat pumps, photovoltaic panels, batteries, thermal networks, and more – which technology will emerge as the winner? Each has its own advantages and disadvantages, with the risk of adoption playing a significant role. Determining which technology will be widely adopted using positive feedback loops and tip the entire sector into the new state requires immense efforts from stakeholders, including policymakers and consumers. Many billions have been invested in companies such as Google, Facebook, and Amazon as a way to push forward the new standard. This mechanism is often less understood among entrepreneurs. In fact, for start-ups or scale-ups, the mere fact of attracting and securing multiple financing rounds constitute itself a significant competitive advantage regardless of the business economics. It contributes immensely in setting the new norm through the use of non-linearity.

Also, the energy sector introduces additional complexity due to its regulation and strategic geopolitical significance. Whether policymakers can muster the courage to strengthen the energy agenda remains to be seen. What about energy data that can help building owners produce and use energy efficiently? Alternatively, should heavy investments be directed toward infrastructure to move beyond gas once and for all? Many questions persist, but few guarantees exist. We believe the best investment strategy, capable of reaping the benefits of a highly dynamic sector while managing transition risks, lies in technology-agnostic business models. Regardless of the minerals being mined, one will always need shovels. Investors need to find the energy transition shovels.

Nourish & Thrive Conference

The conference "Nourish and Thrive" was organized on October 10, 2023 by 2030, the CEO Alliance for Sustainability, which is a collective of Belgian CEOs (and directors) launched in 2020 to discuss the pressing need for societal transformations and the necessary reinvention of companies.

First of all, the opening words of Olivier Lefebre, pointing out the trade-off between efficiency and resilience, were really laudable, and I don't think it had the effect that it should. To paraphrase him, we have spent too much time making systems optimized and efficient at the cost of resilience and redundancy. This is an important statement coming from an economist.

In fact, we have spent two centuries following the optimization and efficiency mantra to the point where everyone nowadays uses those words almost all the time as if they are the natural way of doing things. "We want to improve; we want to optimize" is becoming the narrative orthodoxy. The fact of the matter is that while optimization and efficiency (to a certain point) can produce good results for engineering problems, which is why it started during the mechanized industrial revolution, it makes systems fragile to external variations. An efficient and overoptimized system is a fragile system. A fragile system is not a resilient system.

This trade-off between efficiency and resilience, or efficiency and adaptability, stems from the level of connectivity between moving parts. A highly connected system such as the food system, as shown by Hans Bruyninckx, displays high-level efficiency. In other words, you don't have decoupled and independent components in the food system that have the property to render the whole adaptable through their own behavior. This apparent fragility is wide open since a slight food shock has the potential for a global impact. This same principle can also be applied at a lower scale, such as organizations. This explains why companies in their quest for efficiency, when they grow, put in place policies and procedures that render them rigid and unable to adapt to internal or external variations.

Having been to many conferences that discuss major issues such as climate change and subsequent strategies to deal with it, the discussion frequently leads to the trap of pointing out political decision-makers. Notwithstanding the role of the latter, this is, for us, an admission of a failure to internalize that the problem is complex. And complexity cannot be sorted out with simplicity. It's not just enacting laws that are going to make the problem disappear. It's very complex, let's simplify. We have been hearing this over and over again. Unfortunately, it does not work like this, period.

A complex problem emerges when you have various connected parts, each with its own properties and agenda. It creates a whole that is difficult to predict. A simple solution would not only not work but can lead to adverse effects. A complex problem requires, first and foremost, a complete acknowledgement of this fact. Second, it requires complex thinking, which is not as bad as it sounds. It basically implies that one should gather a diverse set of stakeholders generating diverse opinions and a solution from which to choose.

Now, to come back to the initial issue of climate change and its consequences, two options are possible: top-down and bottom-up approaches. The latter would foster diversity and innovation as a way to shift the degradation pattern. However, given the fact that we are here dealing with an existential risk and that the rate of climate change is accelerating, we don't think we have another choice. But what top-down approaches are we talking about? At the national level, EU level, or global level. The task is monumental. This may seem fatalistic, but maybe we need to wait for the next global crisis à la COVID to start acting. Some will fare well; others will adapt, and obviously, some will struggle, but life will always find a way.