Buy and Build Strategy - Growth by Acquisition for Medtech Start-ups, Istok Sernc

As opposed to frequent supplementary financing in bio-technology, medical technology relies above all on new investments. Once venture capital providers hold a participating interest, they can adopt their strategies, e.g. growth through acquisition.

Even if start-up companies are comparatively small, this can bring them a number of advantages, explains Istok Sernc.

Benefit of smaller units

Is there really any point in young start-up companies opting for growth through acquisition - considering the fact that even after a merger the company size is still only a fraction of that of global corporation rivals? The reason why this applies is due to the particular way that the health and medical branch organise their work. One of the principles, based on human experience in general, is the preference for smaller units - the so-called subsidiary principle - and it works in favour of smaller companies. It is for this very reason that car manufacturers turned off their conveyor belts and switched from mass production to smaller engineering groups, achieving equally good or even better results with fewer employees working as a team, resulting in a higher degree of identification with the company, more personal responsibility and ultimately more individual freedom. It cannot be denied that hurdles must be overcome before implementing the buy and build strategy for investors, not least because of an increased risk aversion by investors and less support from new venture capital funds. At the same time, it is on an almost daily basis that investors are faced with lots of inspiring ideas in the shape of exciting new business plans from founders in the Life Sciences Sector.

Implementation of a Buy and Build process

The process begins with logical analysis. Prior to a more detailed inspection, the potential use for a strategic acquisition must be analysed in relation to cost (Screening). Corporate strategy or 'acquisition strategy' must be clearly defined in advance. What's wrong with growing at your own pace? What needs to be put in order within your own organisation, before you can consider yourself ready to embark on co-operation or merger? In this context, not only your own portfolio interests must be considered, but also those of both the target company and the venture capital investors. This cannot be done without informed reference to technical and marketing expertise of the portfolio company's management.

Another important aspect is establishing which synergies and crucial competitive advantages can be derived from cooperating with another company (strategic partnership assessment). An additional asset would be for instance, if the operational business interests of the two companies complement each other (performance variation) which means that they can ideally offer the perfect new complete solution to market requirements.

Another important advantage: strong commitment of the founders

One of the essential differences between medical technology and other business areas is a higher average of personnel costs. Therefore significant synergies can be realized by fusing respectively purchasing and merging functional management and administration areas. Additional aspects of interest in favour of participation purchases can consist in mutual client integration, additional services (cross-selling respectively differentiation) and regional market sharing. Location is important too, as medical appliances are subject to licence and registration procedures which vary in different countries - another point in favour of the buy and build strategy on an international level. The next important step consists in identifying an optimal cooperation alternative. For their choice of form and amount of participation, high-tech entrepreneurs have to be aware of the fact that investors value management commitment - in particular if they choose to remain business partners in the new joint venture. As a whole, the process can be considered a success if the new company's production lines are optimally coordinated with each other and, as a result, clients will be served from a single source.

Conclusion:

In comparison to large corporations, medical technology companies may well be considered as small fry - but they can and should still be able to benefit from market-leading strategies and achieve corporate growth by acquisition.

Basically it is fair to say that in view of the present market consolidation within the medical branch that due to the existing market structure with some medium-sized and many small companies conditions for growth by acquisition are excellent.

About the author:
Istok Sernc is an investment manager working for a listed venture capital company in Germany. His responsibilities include financial advisory, independent assessment and valuation of start-up companies and investor relations. In addition he supervises some of the portfolio companies - primarily from optoelectronics, glass fibre technology and medical technology sectors.