To integrate or not to integrate, that is the question.
Door Tom Dejonghe
Check out the pictures of the PE Summit 2024 here... (Fotografie Vincent Gorissen)
More and more companies are no longer growing organically, but through the extremely popular strategy of buy and build. The strategy is also gaining popularity in Belgium, as our first Private Equity Summit showed. What are the challenges, how do you tackle them and how much success can you achieve?
It is gray and chilly outside in Brussels, on this December day, but the inside of the renowned law firm Loyens & Loeff is buzzing with energy. Lots of high potentials and seniors from the M&A world are eager to take part in the Private Equity Summit 2024, which starts with an engaging panel discussion. "In a buy-and-build strategy," begins Thomas Lenné, partner at Loyens & Loeff, "you buy a platform and strategically add companies that fit into it and create synergy." A complex challenge, that much is certain.
Start-to-buy and build
"Our dream is very simple: we want to become the largest company in HR services in Europe." Nico Bogaerts, European head of M&A Europe at SD Worx, brings a first variation on the buy and theme. "That is why we are building a platform in all the larger European countries in which we are not yet active, and then filling it in with the buy-and-build strategy. For example, we recently acquired our Italian sector partner F2A, a company that is taking full advantage of the fragmented Italian market. In total, we have thus become active in ten additional countries in the past three years."
Jorn de Ruijter, in turn, is investment director at Main Capital Partners, one of the leading private equity funds investing in enterprise software within North/Western Europe and the US. "We look for niche players," he says, "which we then grow into far-reaching specialized players in a particular enterprise software market." Patty Terryn, commercial director at BNP Paribas Fortis Private Equity, is also present. "We take minority shares in Belgian companies, completely sector agnostic," she says. "The majority shareholder or the management team often already knows which acquisitions he or she wants to make. Where necessary, we then provide strategic support to guide the company through that process."
How to choose the targets?
What the experts tell us already brings us to the first crucial challenge: how do you select the right targets? "The best way to do this is to count on local people who have many connections with interesting sector peers through their networks," stresses Nico Bogaerts of SD Worx. "In addition, banks share a lot of insights from market analyses. In our case there is CVC Strategic Opportunities II, our new minority shareholder, which opens a lot of doors for us at competitors."
"Main Capital focuses strongly on profitability when looking for targets," Jorn de Ruijter continues. "In addition, we want to work with founders who built and kept their companies completely bootstrapped. That makes negotiations easier. We try to reach those founders directly, through events. In this way we built a database of about 15,000 companies, from which we then select potential targets. With a fit in terms of region, product and technology." Finally, the network is also key at BNP Paribas Fortis. "We use our international commercial banking network as much as possible to find interesting targets for the companies in our portfolio," explains Patty Terryn.
To integrate or not to integrate?
That's the next question. "We always integrate fully, as soon as possible after the acquisition," Jorn de Ruijter explains, "putting the acquired products into our matrix of product lines. Centralized management provides the most value for us because, for example, it makes it easier to sell again over time."
"Full integration was until recently also our rule," Nico Bogaerts continues. "But if, like us, you become active in ten additional countries in three years, it is quite a challenge to realize buy and build with full integration everywhere there. So we evolved from a totally centralized to a more decentralized organization. Again, the countries have a little more accountability."
The cultural fit
Sometimes it's downright a dealbreaker when the cultural fit isn't there. Nico Bogaerts of SD Worx testifies: "The price was market-based and the deal seemed to be in the bag... But we felt that something wasn't right. Our CEO decided not to go ahead with it because the cultural fit was not there. In countries like Croatia, Romania and Poland, it sometimes takes longer to gain trust, but a lot also has to do with personalities. I remember a deal between a Dutch and a Walloon company, where it was a problem that they toasted with cava and not champagne." "I recognize a lot of that," Patty Terryn responds. "Negotiations between Dutch and Belgian companies are sometimes already difficult, let alone with countries with a very different culture. Or with a completely different language and poor knowledge of English."
Is specializing a must?
The short answer? Yes. "We are currently organizing internationally around ten to twelve product markets, such as healthcare software," Jorn de Ruijter explains. "Thereby centralized market expertise is of great importance, among other things to position add-ontargets optimally in our portfolio." " BNP Paribas Fortis Private Equity can count on a lot of market expertise through commercial and corporate banking," continues Patty Terryn. "Moreover, we established a sustainability competence center and we are involved in many university spin-off funds, for example."
"In the HR services market, we also pay attention to adjacent domains," Nico Bogaerts explains. "In addition, we buy technology that has not yet gained traction in the market, but is good and fits into our solutions. In turn, our central intelligence team captures market trends, surveys customers to discover their future challenges."
Case Protective Group: how successful can buy and build become?
Protective Group showed us at this PE Summit how a buy-and-build strategy can lead to impressive growth. "Protective Group supports major long-term transformations in the financial sector," says CEO Stefan Dierckx. "With this offering we compete with the big four, but through specialization we make the difference." With success, Protective Group now has six European offices, 1,100 employees and 135 million euros in revenue. The foundation was laid in 2006, with expansion into the Netherlands, Germany and the UK. A partnership with McKinsey gave Protective Group prominence, but Stefan Dierckx turned down a takeover by McKinsey. The breakthrough came in 2018 with the acquisition of Exellys, a company that outsources and supports financial talent. "This gave us 150 consultants on board and accelerated our growth," says Stefan Dierckx.
In 2019, Protective Group entered into a partnership with Gimv. "What attracted us was their expertise in a sector facing major transformations," says Ruben Monballieu, partner at Gimv. Together, they focus on acquisitions that are geographically and substantively complementary. "We are looking for targets with the same DNA," Stefan Dierckx emphasizes.
The goal? "To be a regional leader in financial change advisory by 2026 and a pan-European leader by 2030 with 500 million euros in revenue," concludes Stefan Dierckx ambitiously.
Under the approving eye of the BMA
We ended the very first Private Equity Summit with a presentation by Axel Desmedt, the new president of the Belgian Mededingingsautoriteit. "A new study made for the European Commission shows that industrial concentration has increased over the past 25 years, certainly in the U.S. but also in Europe. Something that worries the BMA. Because it impacts countries' GDP, macroeconomic performance and innovation. So we need to continue to protect against anti-competitive practices."
Axel Desmedt: "For example, with certain mergers we look at what the impact of the transaction would be on the market and whether or not we should allow it. Or let it go ahead, subject to certain conditions or remedies. These are only transactions that permanently change the control of a company. Moreover, the companies must have a combined turnover of more than 100 million euros in Belgium and two of the companies involved must have a turnover of at least 40 million euros in our country. Only if both turnover thresholds are exceeded are you obliged to report the merger to the BMA. With a few exceptions, you then have to wait for our approval first."
What procedure the BMA then goes through? "First the pre-notification, where the BMA requests all the information it needs to understand the market impact of the transaction and the combined market share of the companies. If that share does not exceed 25 percent of a market relevant to the transaction, the BMA follows a simplified procedure with a shorter processing time. The key is to provide all requested information during pre-notification. Otherwise we are forced to initiate longer procedures: a phase one with a formal investigation or even a phase two if serious doubts arise. Now, generally we approve mergers. Why? Because the parties themselves usually already cancel the transaction when a decision on whether or not to allow it is imminent. And to reassure you, we only look at transactions where something is clearly wrong."
With those reassuring words from Axel Desmedt, the chairman of the Belgian Mededingingsautoriteit, the well-attended first edition of the Private Equity Summit ended. It was a day full of fascinating insights about how successful buy and build can be as an M&A strategy, but also about the challenges involved and how to deal with them. More than enough input for the guests to delve even deeper in and inspire each other during the concluding walking dinner.
Read also: Celebrating excellence: The 7th annual M&A Awards Belgium
