Private Equity Add-On Acquisitions and Adjacency Innovation
Pitchbook had posted a statistic a few weeks back that according to their numbers there have been 111 add-on acquisitions so far in 2009. Considering that add-on acquisitions help to bolster core business or provide access to complimentary markets, it should stand to reason that add-on acquisitions should be at an all time high.
Interestingly enough, Pitchbook also provides figures for the historic percentage of add-on to total acquisitions, 32%, and the current pace is right in line with historic averages. Additionally, Q1 saw 71 add-on deals with Q2 only 40 which means there is a potential to dip below the historical average (June started quick so that remains to be seen). This is even more interesting considering recent comments on the type of innovation to pursue now made by Vijay Govindarajan, an expert on innovation and strategy from the Tuck School of Business at Dartmouth, on how corporate resources should be spent in a recessionary period. Mr. Govindarajan recommends that businesses in a recession should spend 70% of their time on the core business, 25% on adjacency innovation and 5% on break-out (high risk/high reward) innovation. Considering that an add-on acquisition is in effect adjacent to the core business, this makes the above trend even more counter intuitive. My guess would be that there is still a gap between buyer and seller expectation in addition to downward pressure on deals due to interest rates moving back up. Either way it is one more confusing indicator to compare against the other “green shoots” that are being touted by many as signs of economic recovery.
