How to determine if growth from acquisitions is good growth?
I am a consultant, not banker so I have some questions regarding valuation. I do a lot of CDDs of sponsor backed assets. In almost all of these cases the firms VDD / company presentation boasts about it strong growth (which is primarily due to acquisitions).
Reading financial statements becomes really skewed. You have jumps in revenue every year to add ons here and there.
My question:
Just because revenue/EBITDA increases does not necessarily mean that value is created. Acquistion cost shareholders equity/debt and there would need to be a proper assessment of acquisition price vs. return to judge whether the company is actually doing well.
How do you look as bankers on such assets? How do you determine the growth in i.e. a FCF model if the big jumps in revenue are mainly driven by acquisitions?
These are called rolls-up and it entirely depends on the investor’s strategy (as well as industry) with regards to how they view it… just need to fine tune the marketing strategy and select appropriate investor for the asset
I cover tech and here are some examples
1/ in services space it’s generally viewed positively as revenue commitments are long term and acquisitions are a step function in growth
2/ in early stage software it’s viewed negatively as it indicates prb with product or customer acquisition/ adoption
3/ viewed positively in late stage software as it’s viewed as filling white space in product portfolio
A/ someone like insight/ GA will view it negatively
B/ investors like STG/platinum will view its positively
C/ I have generally found corporates not liking an asset like this but if it’s in a high demand sector or if the corporate is desperate to make the news then doesn matter
TLDR; its contextual, as long as they are buyers for these assets and fees are fat, we don’t care as long as we can close is fast
Spot on…I would add in current market scenario, even the likes of Insight / GA are focused on growth thru acquisitions…they call em BOLT-ONs
It’s difficult to remember now but if you look it up LVMH was built this way
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