Platforms, Add-ons: To Buy or Not to Buy –

With all of the recent (and not-so-recent) corporate scandals continuing to block public market exits, many buyout investors are busy bulking up existing portfolio companies or niche investment platforms in the hope that size might matter to fickle IPO buyers. The practice is called add-on investing, and it is beginning to catch hold.

The Riverside Company – which purchased famed automotive industry catalog retailer J.C. Whitney & Co. a few months ago – recently purchased three add-on companies. Riverside has been in the midst of a brisk investment pace, with nine done deals (several of them add-ons) in 2002. Its recent purchase of the trio of cement and rubber-related companies – Bidco Sealants, Bidco Fibre and Custom Rubber Extrusions – would imply that this is the season for add-on purchases.

“Considering that the exit market has not been good, rather than selling, [private equity firms] are hoping to build the companies,” said David Mussafer, a managing director at the Boston office of Advent International. “They hope to create value, and find a more attractive exit opportunity for a larger entity. Most folks on the private equity side will continue to focus on their core businesses, and be aggressive in buying small add-ons, in an depressed environment.”

Yet Mussafer is looking ahead to the future. “I think you are starting to see more standalone purchases. While the market is still slow, there have been some signals. There could be an improving economy, but the market is still very slow.”

Asked if he had heard of any deals that seemed out of place, Mussafer said that he had not seen “as many crazy deals as there used to be. There was a clearly a period – between 1998 and 2000, on the buyout side – where there were some different’ deals, with aggressive financing.”

Steven G. Segal, a partner at J.W. Childs Associates LP, said it is typically easier to add to a company than it is to start from scratch. “With a number of factors involved, the size of the company that you can take public is a big issue. [With] a larger company, it is easier to access the public market. If they had difficulty raising new money, and sitting with a existing portfolio, they may want to add to add to their existing portfolio,” he explained.

Asked whether the current market was the reason that add-on deals seem to outnumber platform deals recently, Segal said, “The current economic environment – or timing issues – are not the issue. Integration of MIS issues, sales force, and other administrative consolidations are the true issues. But doing it through smaller steps, you will not encounter as many hurdles. There are sometimes deals that sound great on paper, and when sitting in a conference room, it all seems like a good idea at the time, but it doesn’t always work out to be as easy as you thought.”

Following those tenets, Lake Forest, Ill.-based RoundTable Healthcare Partners, through its affiliate Vanguard Medical Concepts Inc., acquired the assets of medical device “reprocessor” Medical Instruments Technology Inc. (MIT) earlier this year. Terms of the transaction were not disclosed, but sources claim that it was less than $10 million and was made through RoundTable’s $400 million debut fund.

The MIT acquisition adds cardiac retractors and stabilizers, trocars, curved arthroscopic shavers and orthopedic sharpening technology to Vanguard’s reprocessing service portfolio. RoundTable feels MIT is a complementary add-on acquisition for its platform in medical device reprocessing. RoundTable typically seeks to partner with established health-care companies and successful management teams. The company will concentrate on sales and marketing first, and manufacturing eventually.

Charles Masek, Vanguard founder, president and CEO, said in a statement that this investment gives his company orthopedic sharpening technology capable of reprocessing to sharpness “even greater than the original device.”

Another turnaround specialist, Sun Capital Partners, was the winning bidder earlier this year for the U.S. assets of ACT Manufacturing in a deal valued at $6.6 million (with an adjustment being determined). The transaction was made through its second fund, which Sun Capital closed in May 2001 on $200 million.

Sun is conducting the transaction through its Sun ACT Acquisition Corp. vehicle. The platform will provide electronics manufacturing services to original equipment manufacturers in the networking and telecommunications, high-end computer and industrial and medical equipment sectors.

The ACT transaction brings to 16 the number of deals the firm has completed in the past 12 months. In June, Sun Capital agreed to purchase the assets of day-care chain Tutor Time for approximately $30 million. In May, Sun acquired the assets of bankrupt Nationwide Warehouse & Storage. In April, the firm acquired the image products business of U.K. consumer packaging company Rexam for GBP42 million ($60 million); third-party administrator Benadco through its HealthPlan Holdings portfolio company for an undisclosed sum; the assets of bankrupt industrial products manufacturer Carbide/Graphite Group for $50 million; and BMK, a distributor of merchandise to supermarkets and drugstores, for $55 million in cash plus the assumption of certain obligations.

Obviously, in the current economy, several companies are exploring add-ons as an option. The benefits can be huge (increased production, capability through different markets), and the negative aspects are few (while capability could be a problem, there is time and the two companies ability to focus energy upon a common goal that will save them).