Programmatic M&A: the route to sustainable value creation?

English
June 30, 2022
Jelle Stuij
COO

Companies that regularly and systematically pursue M&A opportunities in the lower mid-market, outperform those that don’t, according to McKinsey. Two decades of research shows that, while large deals still have their place, programmatic M&A strategies create gains in excess total returns to shareholders and at lower levels of risk.

Indutrade can confirm this. The international technology and industrial business group acquired its first company, Bengtssons Maskin, in 1978 - a family-run transmissions firm in Southern Sweden, which it still holds today. At that time, one of the founder’s sons - who remained in the business as Managing Director - was tasked with finding other family-held companies in the same region to form a group. Within a few years a second company, a machinery and plastics specialist, was acquired. The two businesses had little in common except that they were both innovative trading companies with bright futures. Indutrade has continued in this vein for the past 44 years, growing to around 200 companies today.

In contrast to selective strategies, which tend to focus on opportunistic large deals, programmatic M&A is not about meeting a deal quota in a specific timeframe. Instead, it aims to build a business through a series of deals, to create something new and to increase market cap. According to those surveyed by McKinsey, the average programmatic acquirer makes around three or four deals a year. Indutrade is at the top end of this spectrum, acquiring more than one company a month, and 17 companies in total last year.

From its beginnings in Sweden, the group expanded into the Nordics and Benelux countries in the 1980/90s and into the UK and DACH region about 10 years ago. It also has presence in the US and China and, last year, acquired its first company in Italy.

“We are a big group if you sum up the turnover, around 2.2 billion euros, but if you divide this by 200 companies the average company is relatively small at around 10 million euros,” says Gustav Ruda, a senior member of Indutrade’s Acquisitions and Business Development team. “The important thing is, we act like a smaller company – entrepreneurial and fast-paced.”

So, what’s the secret to success? For Indutrade, knowledge sharing, decentralisation, entrepreneurship, and sustainable profitable growth are the core drivers.

Leveraging knowledge

Unlike many M&A strategies, Indutrade’s focus is not on creating sales or cost synergies. There is only one synergy that is important to the group - knowledge.

“If you have 200 companies, you have 200 local MDs, 200 CFOs or FDs,” says Gustav. “There is a lot of knowledge within the group, and we leverage that by getting key people together on a regular basis – to exchange ideas and best practices.”

Extreme decentralisation

While sharing knowledge is essential to collective success, so is maintaining independence and entrepreneurial spirit. Indutrade companies are primarily family-held, innovative companies that are buzzing with new ideas and they are given full freedom to explore them. Each company MD is fully responsible for their P&L and balance sheet. They have the right - and the obligation - to act in respect of their company.

Sustainable growth and a deep investment in the business

As Mckinsey notes, successful programmatic acquirers do not run M&A like a procurement process. They run every deal like a partnership in which the value proposition offers more than just a big cheque – they buy the target to develop the business and drive the business forward together. Indutrade does exactly that, acquiring companies to own them and keep them for the long term.

Indutrade operates a multi-brand strategy in which each individual company retains their original name, brand and culture. “For us, it’s about evolution rather than revolution,” explains Gustav. “We look to make changes over time. There is no ‘100 first days’ plan like there often is in private equity – for us it could take two to three years before we fully understand a new company, only then will we suggest changes.”

The success of programmatic strategies ultimately relies on the strength of relationships. “We behave like people and we care,” says Gustav. “We want the seller to meet with former colleagues in 10 years’ time and say, ‘it was good for me’. All our deals are designed to be a win-win-win – good for the company, good for the seller and good for Indutrade.”

Proactive deal sourcing

But success in programmatic M&A does not come easily. Companies that follow a programmatic approach work hard to build their business on a daily basis. They focus on, and leverage, the power of relationships and partnerships to create a constant source of deal flow.

“If we acquire 17 companies in a year, you can imagine that we get a couple of hundred business proposals. Still, we are always looking for new ways to hear about potential acquisitions,” says Gustav. This is particularly important in the fragmented small cap and lower-mid-markets, he adds. Using the Dealsuite platform has given Indutrade another avenue to build these essential relationships.

“There are so many advisers in the market - we don’t know all of them and they are not all aware of us either. Dealsuite is a good marketplace and tool we can use to get to know each other.”

What’s next for Indutrade? The company is seeking to add to its presence in Italy, especially the Northern parts of Italy, which has the biggest industrial turnover In Europe. Germany is another interesting market, but one that has been hard to crack, says Gustav. “We always try to understand the business culture in areas where we’re looking to acquire – the mentality and approach to business - we believe our approach and model is a good fit for family-held German companies but, to date, it has been hard to find the right companies, even though we have made a handful of acquisitions in the past years.”

Gustav Ruda