The common wisdom is that private equity funds will purchase a “platform” company, and then seek to build on that platform with “rollups” until a certain enhanced size is reached.  Then, the company can be sold or can go public, enjoying a greater value multiple. 

Not so fast, said a panel of senior private equity professionals at Duane Morris’ October 2 private equity forum held in Boston. 

Participants included Marty Mannion, Managing Director of Summit; Jay Jester, Managing Director of Audax; Tom Wippman, Senior Outside Legal Advisor to Sterling Partners; and Phil Mazzini, former President of H&R Block’s retail business who built that business through “hundreds of acquisitions.” 

The game has changed, agreed the panel, since the old days when the idea was simply to do acquisitions, grow bigger and then assume an enhanced value.  A more sophisticated investment environment requires more than mere conglomeration leading to size, but rather enhancement of the businesses. 

Key points:

• * It is important to start with a solid platform company with strong, acquisition minded management.  The HR factor, and adequate integration of add-ons, has become central; “in the day,” integration was never looked at, only size. 
• * Carefully pick an industry in which you propose to do a rollup; is it possible?  You might ask, is anyone in the industry already doing a consolidation?  Although some may think, “no one is doing it so what a great opportunity,” the panel agreed that it is a negative sign when people who know the industry best are not attempting consolidation. 
• * Finally, the PEs acknowledge that they are unlikely to be able to compete with a strategic buyer.  The strategic simply knows more, knows where cost savings are most likely to occur, and is thus likely to out-bid the private equity fund.