Buy mediocre company, strategy of add-on acquisition?
In a deal that recently went through, my client [PE firm] completed a transaction. Based on my MBB firm's due diligence, it seems like a pretty terrible company.
We flagged to them some of the risks associated with the transaction—-none of which they were previously aware of—-and that the TAM is decreasing by 3-4% every year.
In spite of that, they went through with the transaction, and are now pursuing a buy-and-build strategy.
My questions:
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Is it common to buy mediocre companies specifically for the purposes of add-on acquisitions? (PE client is not a distressed buyer)
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Any recommendations whether or not on a deal walkthrough, I should concur with the PE firms' decision (i.e., "I agree with this decision. Despite the risks, the company has strong cash flow profile, long-term contracts, and can make accretive acquisitions in this fragmented industry", or dissent? (i.e., "Personally, I disagree with this decision. The market headwinds are too strong for me to ignore. Even if we pursue a buy-and-build strategy, the core of our business remains in a declining market")
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Frankly, even if you buy-and-build, the core of the business is still going to be sh*t. And what strategic buyer is going to want to buy portco a dying industry. Any thoughts?
Not enough data. How good of a deal, in $ terms, did they get? If you buy a mediocre company for the price of a shit company then you just made a killer deal because it won't take you even a year to fix the company and now you will be able to sell it for much more. If you buy a mediocre company, for the price of a good company, then you just fucked yourself right in the ass because best you can do is turn it into an actual good company for which no one will be willing to pay more than you did.
Given that we are mid-recession, I assume it is the former. TBH buying a mediocre company when valuation multiples are down the shitter is a genius move because all you have to do is wait a few years (which you would have done anyways) to sell at the new top the moment JPow starts printing money like a maniac again like he usually does.
I'm a MBB consultant. I don't know the exact terms of the deal. But as I wrote, TAM is declining 3-4% every year. This is out of the control of the target / portco—-it's simply a declining industry.
Their strategy is clearly buy-and-build, and already they have acquired a number of add-on acquisitions in adjacencies that are more attractive. But even if they were going to pursue this add-on strategy, couldn't they have bought a less sh*tty platform company?
In 5 years, they'll still have a sh*tty base company, in a declining market, with a few nicer add-ons. Is it worth it? IDK. But if I'm going to walkthrough this deal, I need to figure out what to say
Very sector dependent but I get the sense the whole buy and build model is going to blow up in a lot of GPs faces (namely HC) as the market is saturated with buyers up and down the size spectrum. Know several people who work directly for these platforms in HC and they can't buy a single company because A. they now know what they're really worth so can't low ball them for 3x EBITDA on a medical practice, and B. they don't want PE touching their business. Just my 2 cents but given this GPs are going to have to buy shittier platforms which will lead to problems down the road.
I wonder if OP works at MBB?
You ever think that maybe ur MBB firm diligence is worth jack shit? - Nobody gives a fuck what you useless leeches say, you’re generally wrong, and just provide cover for boards and c-levels.
The defence presents Exhibit A: The amount of times our PE clients have turned down making an offer on an asset because our diligence says the asset is shit
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