That asymmetry is worth naming precisely, because it is where the rest of this Notebook, and the research it accompanies, tries to contribute.

What the field establishes: private-equity value creation

The foundations are solid. Early accounts located the value of the leveraged buyout in governance and incentive discipline, the alignment of owners and managers and the discipline of debt on free cash flow (Jensen, 1989). Later work organised the sources of buyout value into financial, governance, and operational engineering, with operational engineering, the industry and operating expertise a sponsor brings, emerging as the distinguishing capability of leading firms (Kaplan & Strömberg, 2009). And the returns themselves are real but heterogeneous and persistent across funds, which points to sponsor skill rather than luck (Kaplan & Schoar, 2005). On the economics of private equity, the field is on firm ground.

What the field establishes: the economics of buy-and-build

On buy-and-build specifically, the descriptive record is increasingly strong. Inorganic growth through add-ons has become central to the private-equity business model (Hammer et al., 2017), and the strategy can earn above-average returns despite premiums paid for add-ons, through a combination of top-line growth and multiple expansion, the familiar effect of buying small and selling big (Hammer et al., 2022). The conditions under which consolidation creates value, the industry and platform characteristics that make it attractive, have begun to be specified (Bansraj & Smit, 2017). The field can tell you that buy-and-build pays, roughly when, and through which financial channels. Notably, much of this evidence is drawn from European samples, leaving the larger and more add-on-intensive US market comparatively underexamined.

What the field underexplains: the mechanism

The gaps appear when the question turns from whether to how. Three are worth naming. First, target-selection research is built overwhelmingly on corporate acquirers and assumes strategic fit as the motive; it rarely accounts for the distinctive incentives and finite horizons of financial sponsors, and the recent move to theorise private equity as a specialised intermediary (Nary & Kaul, 2023) has not yet been brought to bear on add-on selection. Second, what work exists on private-equity selection examines investor preferences at the platform stage rather than the sequential add-on logic that defines buy-and-build (Osborne et al., 2012). Third, and most fundamental, the field models selection as a discrete, static event rather than the unfolding process it is in a sequence of deals (Welch et al., 2020), even though performance is best understood at the level of the acquisition programme (Laamanen & Keil, 2008). The result is a literature rich in outcomes and prices and thin on the mechanism that produces them.

A worked illustration: the question the field cannot yet answer

The gap is easiest to see as a question the existing evidence cannot resolve. Suppose two US building-products platforms run the same thesis over the same five years, pay similar multiples, and operate in the same fragmented market. One compounds; the other stalls after its fourth add-on. The financial literature can tell you the average platform in their cohort earned a given return through growth and multiple expansion. It cannot tell you why these two diverged, because the divergence lives in the mechanism: the accumulated integration capability, the recursive build-borrow-buy choices, and the way the selection criteria did or did not update across the sequence. Those are exactly the lenses this Notebook has applied, and exactly the variables the descriptive literature does not capture. The study that would answer the question is a process account of how selection actually unfolds, which is what the field still lacks.

What the field still needs

Four gaps, stated as an agenda rather than as claims:

1. A private-equity perspective on selection, built on sponsors’ incentives and finite horizons rather than imported from corporate-acquirer research.

2. Add-on-level study, examining how sponsors identify and prioritise add-ons over a hold period, not just how they choose platforms.

3. A process account, treating selection as a sequence in which each deal reshapes the criteria for the next, rather than as a discrete event.

4. US evidence, since the market where add-on activity is most intense is the one least examined.

Closing the Notebook

Read together, the seven notes make a single argument. Buy-and-build advantage is built, not bought (the resource-based view); platforms acquire rather than contract when ownership is the cheaper governance form (transaction-cost economics); selection is a resource-matching and integration decision, not a quality screen; the thesis forms through a deliberate-emergent process; integration capacity, not deal supply, is the binding constraint; and the optionality languageplatforms borrow from finance describes value but not mechanism. The literature establishes that buy-and-build works and what it costs. How it works, and why otherwise-similar platforms diverge, is the open question, and it is the question the research behind this Notebook sets out to answer.

References

Bansraj, D. S., & Smit, H. T. J. (2017). Optimal conditions for buy-and-build acquisitions [Preliminary version]. Erasmus School of Economics.

Hammer, B., Knauer, A., Pflücke, M., & Schwetzler, B. (2017). Inorganic growth strategies and the evolution of the private equity business model. Journal of Corporate Finance, 45, 31–63.

Hammer, B., Marcotty-Dehm, N., Schweizer, D., & Schwetzler, B. (2022). Pricing and value creation in private equity-backed buy-and-build strategies. Journal of Corporate Finance, 77, 102285.

Jensen, M. C. (1989). Eclipse of the public corporation. Harvard Business Review, 67(5), 61–74.

Kaplan, S. N., & Schoar, A. (2005). Private equity performance: Returns, persistence, and capital flows. The Journal of Finance, 60(4), 1791–1823.

Kaplan, S. N., & Strömberg, P. (2009). Leveraged buyouts and private equity. Journal of Economic Perspectives, 23(1), 121–146.

Laamanen, T., & Keil, T. (2008). Performance of serial acquirers: Toward an acquisition program perspective. Strategic Management Journal, 29(6), 663–672.

Nary, P., & Kaul, A. (2023). Private equity as an intermediary in the market for corporate assets. Academy of Management Review, 48(4), 719–748.

Osborne, S., Katselas, D., & Chapple, L. (2012). The preferences of private equity investors in selecting target acquisitions: An international investigation. Australian Journal of Management, 37(3), 361–389.

Welch, X., Pavićević, S., Keil, T., & Laamanen, T. (2020).The pre-deal phase of mergers and acquisitions: A review and research agenda. Journal of Management, 46(6), 843–878.

Looked at closely, a tension appears. Real options theory offers a compelling way to value investments under uncertainty, but it is far less clear that it explains, or guides, the organisational reality of buy-and-build as it is actually executed. This note examines that tension. The narrow question is whether real options is an operative mechanism in buy-and-build or primarily a retrospective valuation and sensemaking lens that overstates managerial flexibility.

My argument is that real options theory helps explain how acquisitions can create contingent growth opportunities, but that it systematically overstates the degree of reversibility, discretion, and modularity available to a platform running a serial-acquisition strategy. In practice, buy-and-build outcomes align more closely with the resource-based view, developed in the first note of this Notebook, than with real options logic. I hold that as a proposition to be tested, not a settled finding, because the evidence on how sponsors actually decide is still thin.

The promise of real options

Real options theory emerged to address a known weakness of traditional capital budgeting. Net present value treats an investment as a now-or-never commitment, discounting expected cash flows under a fixed plan, and it performs poorly under uncertainty, learning, and staged commitment. Myers (1977) coined the real options framing, observing that many corporate assets, growth opportunities especially, behave like call options whose value depends on discretionary future investment. Dixit and Pindyck (1994) and Trigeorgis (1996) developed the canonical treatments.

The core insight is that investments embed managerial flexibility. A firm may defer, expand, abandon, or stage an investment as uncertainty resolves, so the investment confers the right but not the obligation to act later. Strategy scholars carried the logic into resource allocation, arguing that firms invest to keep options open and that flexibility has economic value static NPV misses (Bowman & Hurry, 1993). On its face, buy-and-build fits: a platform creates follow-on acquisition opportunities, minority stakes preserve expansion options, and sequential deals resemble compound options.

Where real options enters the buy-and-build literature

The most direct application to buy-and-build treats serial acquisitions as compound option games, in which a platform acquisition creates options on future deals, competitive dynamics shape option value, and positioning affects the value of waiting versus acting (Kogut, 1991; Smit & Trigeorgis, 2004; Smit & Moraitis, 2010). Later work extends the framework to the cognitive biases that distort acquisition decisions, arguing that an options frame can help managers price overconfidence and escalation more accurately (Smit & Lovallo, 2014).

This work is theoretically sophisticated and internally coherent, and it deserves a fair hearing rather than a straw-man dismissal. Crucially, the option-games literature does not assume costless reversibility; it incorporates competition, commitment, and path dependence, which is exactly why it is the strongest version of the optionality case. It also states its own scope condition: real options models are most useful when managers explicitly recognise and manage investments as options. That qualification is where theory and practice begin to diverge.

The operating reality of buy-and-build

In execution, buy-and-build exhibits three structural features that strain the assumptions even a sophisticated options account leans on.

First, organisational commitments are hard to reverse. Options logic values the ability to abandon or defer at low cost. Once an acquisition closes, leadership attention is reallocated, systems are integrated, reporting lines change, and cultural expectations shift, and those changes create organisational sunk costs that are not recoverable even when financial capital might be. Abandonment is available in theory and rare in practice, especially once several integrations overlap.

Second, options interact through shared capacity. Options models often treat options as separable. In a platform, acquisitions compete for the same executive attention, integration capacity, and governance bandwidth, so exercising one affects the value and feasibility of the others. That interdependence is the cumulative-load dynamic of the absorptive-capacity note, and it is hard to represent as a portfolio of independent options.

Third, flexibility falls as scale rises. Successful early add-ons, the ones that validate the thesis, often reduce future flexibility rather than increase it. As the platform grows, the cost of reversing course rises, the organisation becomes less modular, and discretion narrows. That is the opposite of the simple options intuition, and it is the heart of the boundary critique that a sequential stream of investment does not, by itself, constitute a real option (Adner & Levinthal, 2004).

Real options as valuation logic versus operating mechanism

These features point to a distinction worth holding onto. As a valuation logic, real options can articulate why an early investment justifies a premium when future growth paths are plausible but uncertain. As an operating mechanism, it rarely governs how buy-and-build is actually run. Acquisition decisions in practice rely on narratives of fit and adjacency, resource complementarities, governance and integration-capacity constraints, and heuristic thresholds, far more than on option lattices. Formal option valuations, binomial trees and compound-option models, seldom sit at the centre of a board’s decision beyond illustrative analysis. The lens describes a logic of value; it does not describe the machine.

Where the two lenses diverge

The tension with the resource-based view runs deeper than method, because the two rest on different assumptions about how value is created. The resource-based view assumes resources are heterogeneous, capabilities are embedded and path-dependent (Dierickx & Cool, 1989; Barney, 1991), and value is created through accumulation and recombination. Real options assumes decisions can be staged cleanly, flexibility is retained over time, and investments can be abandoned without system-level disruption. In buy-and-build settings the resource-based assumptions dominate observed outcomes: capabilities accumulate unevenly, integration debt compounds, and early decisions shape later feasibility. Acquisitions look less like options than like irreversible resource commitments whose value depends on future recombination capacity.

When real options does add value

The critique narrows the framework rather than discarding it. Real options is most useful in buy-and-build where investments are genuinely staged, as with minority stakes or joint ventures, where exit or expansion rights are contractually explicit, where integration is deliberately limited, and where the platform stays structurally modular. Those conditions are more common at the edges of a strategy than at its core. The compound-option account is most defensible when acquisitions retain genuine separability, which serial roll-ups, by design, tend to lose.

A worked illustration: the option that became a commitment

Picture a platform that takes a minority stake in a regional supplier, structured deliberately as an option: a contractual right to acquire the rest within three years, with the supplier left to run independently in the meantime. On a real-options view this is textbook, a staged investment that preserves the right to expand and the right to walk.

Within a year the logic erodes. The platform, wanting the procurement synergy that justified the stake, begins integrating purchasing and back-office systems before exercising the call, because waiting leaves value on the table. The supplier’s owner, now dependent on the platform’s systems, can no longer be cleanly separated, and the platform’s own operations have been reorganised around the combination. When the three-year mark arrives, the option to walk is nominal: the businesses are entangled, the sunk organisational costs are real, and not exercising would be more disruptive than exercising. The option was genuine at signing and a commitment in practice long before it was formally exercised. The reversibility the structure promised was consumed by the integration the synergy required.

The objection: option-games already model this

The strongest objection comes from the option-games tradition itself: it already incorporates competition, commitment, and irreversibility, so the critique attacks a cruder version of the theory than its best proponents hold. This is fair, and worth conceding. The sophisticated models can represent partial irreversibility and interaction. The disagreement is not really about whether the mathematics can accommodate these features; it is about what does the explanatory work in practice. When a platform’s behaviour is driven by accumulated capability, integration capacity, and the path dependence of earlier deals, the resource-based account names those forces directly, while the options account must enter them as parameters. A lens that requires its central phenomena to be supplied as adjustments is a weaker description than one that puts them at the centre. Real options remains a valuable complement for valuation and for disciplining bias (Smit & Lovallo, 2014); it is not the engine.

Four propositions

Stated plainly, so they can be argued with and tested against cases:

1. Valuation, not mechanism. Real options is a useful valuation and sensemaking lens for buy-and-build, but it rarely governs how platforms actually decide and integrate.

2. Reversibility is overstated. The organisational commitments created by integration make abandonment costly and rare, so the flexibility the options frame assumes is largely illusory at the core of a roll-up.

3. Options are not separable. Add-ons interact through shared integration capacity, so they cannot be treated as an independent portfolio of options.

4. Flexibility falls with scale. Successful early deals tend to reduce future flexibility, the opposite of simple options intuition and consistent with a resource-commitment account.

Why this matters

Real options offers a powerful metaphor for investment under uncertainty. In buy-and-build the metaphor often outruns the mechanism: acquisitions are described as options and experienced as commitments, organisationally, culturally, and cognitively. The further a platform travels along a serial path, the less its future resembles a set of freely exercisable options and the more it reflects accumulated resource positions shaped by earlier choices, the position argued in Resource-Based View Revisited and constrained by the dynamics behind Integration Capacity Is the Binding Constraint. Treated as a partial lens disciplined by the resource-based account, real options earns its place. Treated as the engine of buy-and-build, it misleads.

References

Adner, R., & Levinthal, D. A. (2004). What is not a real option: Considering boundary conditions for the application of real options to business strategy. Academy of Management Review, 29(1), 74–85.

Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120.

Bowman, E. H., & Hurry, D. (1993). Strategy through the option lens: An integrated view of resource investments and the incremental-choice process. Academy of Management Review, 18(4), 760–782.

Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), 1504–1511.

Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton University Press.

Kogut, B. (1991). Joint ventures and the option to expand and acquire. Management Science, 37(1), 19–33.

Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175.

Smit, H. T. J., & Lovallo, D. (2014). Creating more accurate acquisition valuations. MIT Sloan Management Review, 56(1), 63–72.

Smit, H. T. J., & Moraitis, T. (2010). Serial acquisition options. Long Range Planning, 43(1), 85–103.

Smit, H. T. J., & Trigeorgis, L. (2004). Strategic investment: Real options and games. Princeton University Press.

Trigeorgis, L. (1996).Real options: Managerial flexibility and strategy in resource allocation. MIT Press.

This note is about that capacity, and about why it does not scale with experience as smoothly as the plan assumes. The lens is absorptive capacity, the idea that a firm’s ability to take in and use new resources depends on what it already knows and can do. Read into a serial-acquisition setting, it explains a pattern the deal-by-deal view misses: integration capacity, not the supply of targets or capital, is usually the binding constraint on how fast a platform can grow, and under sustained load that capacity can plateau or even degrade.

What absorptive capacity is

Cohen and Levinthal (1990) introduced absorptive capacity to explain why some firms exploit external knowledge better than others. Their claim was that the ability to recognise the value of new information, assimilate it, and apply it depends on prior related knowledge. You cannot absorb what you have no foundation to understand, and that foundation is built by earlier learning. The idea was developed for innovation, but it maps cleanly onto acquisition. A platform’s ability to absorb an add-on, to fold its operations, people, and customers into the whole without breaking either, depends on the related capability it has already accumulated.

This connects directly to the resource-based account in the first note of this Notebook. If integration capability is a strategic asset built through path-dependent accumulation (Dierickx & Cool, 1989), absorptive capacity is the mechanism by which that asset is built and the limit on how fast it can be used. Each integration both draws down the platform’s capacity and, if handled deliberately, adds to it.

Why experience does not automatically compound

The assumption that experience compounds founders on the evidence. The relationship between acquisition experience and performance is U-shaped rather than linear: after a first deal, inexperienced acquirers over-generalise what they learned to dissimilar targets, and only with more experience do they learn to discriminate (Haleblian & Finkelstein, 1999). Experience can teach the wrong lesson as easily as the right one.

What separates platforms that learn from those that merely repeat is deliberateness. Capabilities improve when firms invest in articulating and codifying what they learn, not when they simply accumulate repetitions (Zollo & Winter, 2002), and integration capability specifically improves when experience is codified into tools and routines (Zollo & Singh, 2004). The capability can be built on purpose, through a dedicated M&A function and structured learning processes (Trichterborn et al., 2016), and successful serial acquirers develop a distinct capability in the identification and selection phase through structured feedback (Grant et al., 2022). None of this is automatic. It is the difference between a platform that runs a real post-deal review and one that does not.

The acquisition-programme perspective sharpens the point. Performance is best understood at the level of the programme rather than the single deal, and both the rate and the variability of acquisitions bear on it, moderated by the acquirer’s size, scope, and experience (Laamanen & Keil, 2008). Pace is not free.

Cumulative load: when capacity plateaus or degrades

Here is the part the optimistic plan omits. Absorptive capacity is finite at any moment, and integrations consume it: executive attention, the time of the few people who can actually run an integration, the bandwidth of shared functions. When integrations overlap, as they must in a platform acquiring on a cadence, they draw on the same constrained pool at once. If deals arrive faster than capacity rebuilds, the platform runs a deficit, and the symptoms look like integration debt: systems half-converged, acquired managers leaving, synergies booked in the model but not in the business. Integration is a process with strategic, sociocultural, and learning dimensions, not a one-off event (Graebner et al., 2017), and a process starved of attention degrades.

The capability can also decay outright. Capabilities have lifecycles; they are founded, they develop, and they can mature and decline (Helfat & Peteraf, 2003). Under sustained load, the integration capability that took three deals to build can erode in one overloaded year, as the experienced people who embodied it burn out or leave and the routines stop being maintained. Asset-mass efficiencies, the advantage of already holding a stock (Dierickx & Cool, 1989), run in reverse once the stock is drawn down faster than it is replenished. This is the mechanism behind the stall: not a shortage of targets or money, but a platform absorbing more than it can metabolise.

A worked illustration: the fourth add-on

Consider a platform, stylised but familiar, three add-ons into a building-products roll-up. The first three went well: each was integrated by the same small core team, onto a branch and procurement template that improved with every pass. Encouraged, and under pressure to deploy capital, the sponsor accelerates and signs two more add-ons to close in the same quarter as a delayed systems migration on the third.

The fourth add-on is, on paper, the best target yet. It still underperforms. The core integration team is now running three integrations at once and supervising a migration; the most capable operator is doing the work of two; the shared procurement function cannot onboard a fourth supplier base while re-platforming the third. Nothing is wrong with the target. The platform has simply exceeded its absorptive capacity, and the deficit shows up as the fourth deal’s shortfall and as slippage on the earlier deals it can no longer attend to. A year later, two of the original team have left, and the capability that made the first three work has to be rebuilt. The binding constraint was never the pipeline.

The objection: can’t you just add capacity?

The obvious rejoinder is managerial: if integration capacity is the constraint, hire more of it. Bring in operating partners, build a bigger integration team, professionalise the function. This is right as far as it goes, and the best platforms do exactly that. But it underestimates how much of the capacity is not purchasable on demand.

Absorptive capacity is partly tacit and relational. It lives in people who know the platform’s systems, in working relationships that took years to form, and in routines that are codified but never fully (Cohen & Levinthal, 1990; Zollo & Singh, 2004). You can add headcount, but you cannot add, in a quarter, the related knowledge that lets new hires absorb a target rather than merely staff it, because time-compression diseconomies make rapid accumulation expensive and imperfect (Dierickx & Cool, 1989). Worse, each addition raises coordination load, since a larger integration organisation is itself something to integrate. Capacity scales, but sublinearly, which is why pace, not just capability, has to be managed. The honest position is that capacity can be expanded deliberately and slowly, not summoned to match an opportunistic cadence.

Four propositions

Stated plainly, so they can be argued with and tested against cases:

1. Capacity is the binding constraint. In serial acquisition, integration capacity rather than target supply or capital usually limits how fast a platform can profitably grow.

2. Experience compounds only when deliberate. Acquisition experience improves performance only when it is codified into routines; raw repetition can entrench the wrong lessons.

3. Load degrades capability. Under sustained, overlapping integration load, absorptive capacity can plateau or decline, and the loss shows up as integration debt rather than as a single bad deal.

4. Capacity scales sublinearly. Integration capacity can be expanded deliberately but not on demand, because much of it is tacit, relational, and time-bound; added capacity also adds coordination load.

Why this matters

Read this way, the central management problem of buy-and-build is not finding the next deal but pacing acquisition to the rate at which capacity can absorb it. That is the operator-side argument of Integration Capacity Is the Binding Constraint, and it is the discipline the resource-based and target-selection notes both point toward: the resource that decides outcomes is the one that cannot be bought, and it can be exhausted. It also sets up the next note, on real options, which shows how the optionality language platforms borrow from finance tends to assume a reversibility and a spare capacity that, under cumulative load, are simply not there.

References

Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35(1), 128–152.

Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), 1504–1511.

Graebner, M. E., Heimeriks, K. H., Huy, Q. N., & Vaara, E. (2017). The process of postmerger integration: A review and agenda for future research. Academy of Management Annals, 11(1), 1–32.

Grant, M., Nilsson, F., & Nordvall, A.-C. (2022). Pre-merger acquisition capabilities: A study of two successful serial acquirers. European Management Journal, 40(6), 932–942.

Haleblian, J., & Finkelstein, S. (1999). The influence of organizational acquisition experience on acquisition performance: A behavioral learning perspective. Administrative Science Quarterly, 44(1), 29–56.

Helfat, C. E., & Peteraf, M. A. (2003). The dynamic resource-based view: Capability lifecycles. Strategic Management Journal, 24(10), 997–1010.

Laamanen, T., & Keil, T. (2008). Performance of serial acquirers: Toward an acquisition program perspective. Strategic Management Journal, 29(6), 663–672.

Trichterborn, A., Zu Knyphausen-Aufseß, D., & Schweizer, L. (2016). How to improve acquisition performance: The role of a dedicated M&A function, M&A learning process, and M&A capability. Strategic Management Journal, 37(4), 763–773.

Zollo, M., & Singh, H. (2004). Deliberate learning in corporate acquisitions: Post-acquisition strategies and integration capability in U.S. bank mergers. Strategic Management Journal, 25(13), 1233–1256.

Zollo, M., & Winter, S. G. (2002).Deliberate learning and the evolution of dynamic capabilities. Organization Science, 13(3), 339–351.

There are two ways buy-and-build is run, and the distinction matters. In the first, a predefined roll-up thesis drives everything: a sponsor commits to consolidating a fragmented sector and then selects a platform and add-ons to execute that plan. In the second, the sponsor acquires a promising platform first and constructs the add-on thesis afterwards, refining it as the hold period unfolds. The platforms worth studying are mostly the second kind, and it is in that mode that the gap between plan and reality is widest. This note uses process theory to describe how the thesis really forms.

Deliberate and emergent strategy

The cleanest language for this comes from Mintzberg and Waters (1985), who distinguished deliberate strategy, the part that is intended and realised as planned, from emergent strategy, the part that forms through a stream of decisions in the absence of, or despite, intention. Real strategies, they argued, are neither purely one nor the other but lie on a continuum, and the most useful mode for an uncertain environment is what they called an umbrella strategy: leadership sets broad boundaries and lets the specifics emerge within them. A platform-first buy-and-build is an umbrella strategy almost by definition. The sponsor sets a direction, consolidate around this platform in this sector, and the realised sequence of add-ons emerges from the opportunities that actually arrive.

Why this needs process theory

Describing how a thesis forms over time requires tools built for sequences, not snapshots. Process research treats organisational phenomena as sequences of events whose order and timing carry explanatory weight, rather than as variables measured at a point (Langley, 1999; Van de Ven & Poole, 1995). It also insists on moving from narrative to mechanism: a chronology of what happened is only the surface, and explanation requires the generative structure beneath it (Pentland, 1999). This is exactly what the target-selection literature lacks. The pre-deal phase has been modelled as a discrete, static event rather than an unfolding process (Welch et al., 2020), which is precisely the framing a process account of buy-and-build has to replace.

The acquisition-programme perspective supplies the link to performance. The right unit of analysis is the programme, not the single deal, and both the rate and the variability of acquisitions across the sequence bear on how it performs (Laamanen & Keil, 2008). Selection criteria, on this view, are not fixed inputs; they are outputs of a process that updates with each deal.

A worked illustration: the thesis that bent

Take a platform that begins with a clear deliberate thesis: consolidate independent installation contractors in a regional building-products market, betting that scale in labour and scheduling will lift margins. The first two add-ons are chosen to fit that plan. They also teach the platform something its plan did not contain: the real margin pressure, and the real source of customer loyalty, sits upstream in distribution, not in installation labour.

A purely deliberate platform ignores this and keeps buying installers. A purely opportunistic one chases whatever is for sale. The platform that does well does neither: it keeps the umbrella, consolidation in this region, but bends the thesis toward owning distribution, and its next add-ons are distributors rather than installers. The realised strategy is part deliberate, the regional consolidation held throughout, and part emergent, the shift to distribution learned from the first deals. Neither the original plan nor pure opportunism would have produced it.

The objection: isn’t this just undisciplined drift?

The sharp objection is that emergent strategy is a flattering name for a lack of discipline, a way to dignify chasing deals and rationalise it after the fact. The risk is real, and it is the same hazard the target-selection note raised: a flexible thesis can excuse buying whatever appears. But the deliberate-emergent distinction is not a licence to drift; it is a description of where the discipline has to sit. In an umbrella strategy the boundaries are firm even though the specifics are open, and the test of a well-run emergent process is whether the thesis updates through structured learning, post-deal reviews that change the criteria, rather than through opportunism that merely reacts. Mintzberg and Waters (1985) themselves separate emergent strategy, which is coherent even though unplanned, from what they call unconnected strategy, which is not. The discipline of a platform-first roll-up is not a fixed plan; it is a governed process for revising the plan, and a platform that cannot tell the difference between learning and drifting will not survive either.

Four propositions

Stated plainly, so they can be argued with and tested against cases:

1. Thesis as output, not input. In platform-first buy-and-build, the add-on thesis is built and revised across the hold period; selection criteria are outputs of a process, not fixed inputs.

2. Realised strategy is mixed. The realised sequence of add-ons is part deliberate and part emergent, and treating it as either pure plan or pure opportunism misdescribes it.

3. Process carries the explanation. The order and timing of early deals shape which later deals are seen and chosen, so selection must be studied as a sequence, not a discrete event.

4. Discipline is in the updating. Emergent strategy is disciplined when the thesis updates through structured learning within firm boundaries, and undisciplined when it merely reacts to what is for sale.

Why this matters

Seeing the add-on thesis as a deliberate-emergent process explains something the tidy story cannot: why two sponsors who buy the same platform end up with different companies. The difference is not the plan they started with but the process by which they revised it. This is the connective tissue of the Notebook. The resource-based view says advantage accumulates across the sequence; the target-selection note says each choice embeds the next; and process theory says the criteria themselves evolve. For the dissertation this is the central claim, that target selection in buy-and-build is a path-dependent, recursive process rather than a series of independent fit judgments, and the rest of the empirical work exists to trace how that process actually runs.

References

Langley, A. (1999). Strategies for theorizing from process data. Academy of Management Review, 24(4), 691–710.

Laamanen, T., & Keil, T. (2008). Performance of serial acquirers: Toward an acquisition program perspective. Strategic Management Journal, 29(6), 663–672.

Mintzberg, H., & Waters, J. A. (1985). Of strategies, deliberate and emergent. Strategic Management Journal, 6(3), 257–272.

Pentland, B. T. (1999). Building process theory with narrative: From description to explanation. Academy of Management Review, 24(4), 711–724.

Van de Ven, A. H., & Poole, M. S. (1995). Explaining development and change in organizations. Academy of Management Review, 20(3), 510–540.

Welch, X., Pavićević, S., Keil, T., & Laamanen, T. (2020).The pre-deal phase of mergers and acquisitions: A review and research agenda. Journal of Management, 46(6), 843–878.

Target selection in a platform is better understood as a matching problem. The question is not whether a target is good in isolation, but whether its resources fit what the platform has already built and what it can absorb next. On that view, selection is the first integration decision, taken long before any integration team is mobilised, and a target’s value is buyer-specific rather than intrinsic. This note develops that claim, locates it in the research on the pre-deal phase, and tests it against the obvious objection that quality and price should dominate.

Where selection sits in the pre-deal phase

Target selection is one activity in what Welch et al. (2020) call the pre-deal phase: the sequence of deal initiation, target selection, bidding and negotiation, valuation and financing, announcement, and closure that precedes an acquisition. Their review reaches a conclusion that matters here. Most research treats the pre-deal phase at a high level and models selection as a discrete, binary event, a deal or no deal, rather than as a process in which a candidate set is built, screened, and revised over time. For a one-off corporate acquirer that simplification is tolerable. For a platform making a sequence of add-ons, where each deal reshapes the criteria applied to the next, it removes exactly the dynamics that matter.

Within the platform, selection runs through stages: origination surfaces candidates, screening narrows them, diligence tests the survivors, and a feasibility judgment decides whether the platform can actually absorb what it is about to buy. The research has concentrated on the middle of that funnel, the evaluation of identified targets, and has paid far less attention to its two ends, origination and integration feasibility. Both ends turn out to be where platforms win or lose.

Selection as resource-matching, not quality screening

The resource-based view, developed in the first note of this Notebook, reframes what selection is for. If advantage comes from assembling complementary, hard-to-trade resources (Dierickx & Cool, 1989; Barney, 1991), then the right target is the one whose resources match the platform’s, not the one with the highest standalone quality. Kaul and Wu (2016) make the point directly: a target’s value depends on the acquirer’s capacity to deploy its own resources against it, so the same company is worth more to a platform that can use it than to one that cannot. Whether the platform should prefer targets similar to itself or complementary to it is not fixed; it is contingent on the strategic aim (Yu et al., 2016).

Information conditions shape matching as much as the resources do. Private targets, which dominate add-on pipelines, carry more uncertainty than public ones, and acquirers accept that uncertainty in exchange for a discount (Capron & Shen, 2007). A platform that can read a private target better than rival bidders, because it knows the sector or has worked with the company before, is buying down that uncertainty with a resource competitors lack. Matching, in other words, is not only about operational fit; it is about who can see the target most clearly.

Origination: the front end the literature underweights

Before a target can be screened it has to be found, and how platforms find targets has attracted far less study than how they evaluate them (Welch et al., 2020). What evidence exists points to relationships. Prior alliances shape both which targets come into view and how well their resources are understood (Zaheer et al., 2010), and in the private-equity setting, board interlocks and director networks raise the likelihood that a firm becomes a target at all (Stuart & Yim, 2010). The mechanics of the sale process matter too: most targets are sold through organised auctions or negotiations rather than surfacing at random (Boone & Mulherin, 2007), so access to a process is itself a selection event.

For a platform this front end is decisive. An add-on sourced proprietarily, before it reaches a competitive auction, is bought against less price pressure and with more time to assess fit. Practitioners treat origination as among the strongest drivers of returns, and platforms invest heavily in proprietary channels, from operator networks to data tools, to see targets early. How that origination capability is split between the sponsor’s deal team and the portfolio company’s own management is one of the least theorised and most consequential questions in buy-and-build, because the management of an operating platform often sees adjacent targets that no financial sponsor would surface. The selection logic of a financial sponsor differs systematically from that of a strategic buyer (Nary & Kaul, 2023), and most work on private-equity selection has examined investor preferences at the platform stage rather than the add-on logic that follows (Osborne et al., 2012).

Choosing under uncertainty

Because a target’s value cannot be fully known before purchase, selection is partly a problem of managing uncertainty, and the acquirer’s own history and psychology bear on it. Behavioural-learning research shows that prior acquisition experience shapes later choices, though not always for the better: the relationship between experience and performance is U-shaped, because inexperienced acquirers over-generalise their first deal to dissimilar targets while experienced ones learn to discriminate (Haleblian & Finkelstein, 1999). Pressure and confidence distort the picture further. Firms under pressure to grow through acquisition tend to pay higher premiums (Kim et al., 2011); overconfident managers overvalue targets and the synergies they expect (Roll, 1986), a pattern visible in evidence that acquisitions led by overconfident chief executives are both more frequent and more poorly received (Malmendier & Tate, 2008). Even the composition of the deciding team matters: the technological relatedness an acquirer is willing to take on is moderated by demographic faultlines within its top team (Kavuşan et al., 2022).

This behavioural dimension is the uncomfortable counterpart to the matching story. The same resource-fit narrative that justifies a sound acquisition can rationalise a bad one, and a platform that has integrated a few add-ons successfully is precisely the kind of acquirer most at risk of over-generalising. Disciplined selection therefore needs a check that sits outside the deal logic, which is one more reason origination and feasibility, the two ends of the funnel, deserve as much attention as the valuation in the middle.

Selection is the first integration decision

The deepest reason selection cannot be reduced to a quality screen is that the choice of target embeds assumptions about integration before any integration begins. Post-merger integration is now understood as a process with strategic, sociocultural, and learning dimensions, not a tidy implementation step that follows the deal (Graebner et al., 2017), and the relational signals and commitments formed during selection and negotiation carry into that process long after close. A platform that selects a target whose owner expects to stay and run it has, in the act of selecting, made a governance decision. A platform that wins a target through an aggressive, adversarial process has shaped the integration’s starting conditions before day one.

This is what it means to say selection is the first integration decision. Feasibility is not a separate gate applied after a target is chosen; it is part of what choosing means. The question a disciplined platform asks is not only whether this is a good company at a fair price, but whether it can be absorbed given everything else the platform is absorbing, and the second question is answered, implicitly, the moment the target is selected.

A worked illustration: two add-ons, one platform

Picture a single building-products platform weighing two add-ons in the same quarter. The following is stylised, but the contrast is the point.

Target One is the better company on paper: higher margins, a recognised regional brand, audited accounts, and a competitive auction that signals quality. Target Two is rougher, namely owner-managed, with thinner reporting and no organised process, but it sits in an adjacent product line the platform already distributes, and its owner approached the platform directly because he wants it to be the home for his business and his people.

A quality screen ranks Target One first. A matching view ranks Target Two first, and for reasons that are really integration reasons. Target Two fits the platform’s existing branch and procurement model, so the platform can deploy resources against it that no financial bidder could; it was originated proprietarily, so it carries less price pressure; and its owner’s intent to stay resolves a governance question that, with Target One, would have to be negotiated against the grain of an auction. Suppose the platform buys Target One and it underperforms, not because it was a poor company but because integrating a proud, separately branded business won through a contested process consumed more capacity than expected. Target Two, chosen for fit and feasibility rather than standalone shine, compounds. The selection decision was the integration decision.

The objection: don’t price and quality still decide?

The strongest objection is the practitioner’s: buy good businesses, do not overpay, and integration takes care of itself. There is real force here. Quality and price discipline obviously matter, and a matching story that ignores them is how platforms talk themselves into bad deals at high multiples. The behavioural evidence above is a warning that resource-fit reasoning can be a rationalisation as easily as a justification.

But the objection proves less than it claims. In a competitive auction, observable quality is exactly what every disciplined bidder can see and price, so it is largely competed into the purchase price and cannot, on its own, be a source of advantage. What is not competed away is buyer-specific fit, proprietary access, and the platform’s own capacity to absorb, none of which sit on the target’s income statement. Price discipline is necessary, but it is not where the edge lives. The matching view does not deny that quality matters; it explains why quality alone, fully priced in an efficient process, cannot be the thing that makes one platform outperform another buying from the same pipeline.

Four propositions

Stated plainly, so they can be argued with and tested against cases:

1. Matching over quality. The right add-on is the one whose resources fit the platform and that the platform can absorb, not the one with the highest standalone quality; observable quality is largely competed into price.

2. Origination as advantage. Proprietary origination is a selection advantage in its own right, because it lowers price pressure and improves the platform’s ability to read a target before rivals can.

3. Selection embeds integration. Choosing a target fixes assumptions about feasibility and governance before diligence begins; selection is the first integration decision.

4. Experience cuts both ways. Accumulated acquisition experience improves discrimination but also raises the risk of over-generalisation and overpayment, so disciplined selection needs a check outside the deal logic.

Why this matters

Read as a matching and feasibility problem rather than a quality screen, target selection stops being a procurement exercise and becomes the point where a platform’s resource base, its origination reach, and its integration capacity all meet. The operator-side companion to this note, Why We Acquire: Motives Before Targets, takes the same logic into practice, and the constraint that selection quietly commits the platform to is the subject of Integration Capacity Is the Binding Constraint. The next note in the Notebook turns to how the selection criteria themselves change over a sequence of deals, as a deliberate thesis bends to the opportunities that actually arrive.

References

Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120.

Boone, A. L., & Mulherin, J. H. (2007). How are firms sold?. The Journal of Finance, 62(2), 847–875.

Capron, L., & Shen, J. C. (2007). Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns. Strategic Management Journal, 28(9), 891–911.

Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), 1504–1511.

Graebner, M. E., Heimeriks, K. H., Huy, Q. N., & Vaara, E. (2017). The process of postmerger integration: A review and agenda for future research. Academy of Management Annals, 11(1), 1–32.

Haleblian, J., & Finkelstein, S. (1999). The influence of organizational acquisition experience on acquisition performance: A behavioral learning perspective. Administrative Science Quarterly, 44(1), 29–56.

Kaul, A., & Wu, B. (2016). A capabilities-based perspective on target selection in acquisitions. Strategic Management Journal, 37(7), 1220–1239.

Kavuşan, K., Ateş, N. Y., & Nadolska, A. (2022). Acquisition target selection and technological relatedness: The moderating role of top management team demographic faultlines. Strategic Organization, 20(3), 481–509.

Kim, J.-Y., Haleblian, J., & Finkelstein, S. (2011). When firms are desperate to grow via acquisition: The effect of growth patterns and acquisition experience on acquisition premiums. Administrative Science Quarterly, 56(1), 26–60.

Malmendier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the market’s reaction. Journal of Financial Economics, 89(1), 20–43.

Nary, P., & Kaul, A. (2023). Private equity as an intermediary in the market for corporate assets. Academy of Management Review, 48(4), 719–748.

Osborne, S., Katselas, D., & Chapple, L. (2012). The preferences of private equity investors in selecting target acquisitions: An international investigation. Australian Journal of Management, 37(3), 361–389.

Roll, R. (1986). The hubris hypothesis of corporate takeovers. The Journal of Business, 59(2), 197–216.

Stuart, T. E., & Yim, S. (2010). Board interlocks and the propensity to be targeted in private equity transactions. Journal of Financial Economics, 97(1), 174–189.

Welch, X., Pavićević, S., Keil, T., & Laamanen, T. (2020). The pre-deal phase of mergers and acquisitions: A review and research agenda. Journal of Management, 46(6), 843–878.

Yu, Y., Umashankar, N., & Rao, V. R. (2016). Choosing the right target: Relative preferences for resource similarity and complementarity in acquisition choice. Strategic Management Journal, 37(8), 1808–1825.

Zaheer, A., Hernandez, E., & Banerjee, S. (2010).Prior alliances with targets and acquisition performance in knowledge-intensive industries. Organization Science, 21(5), 1072–1091.

That explanation is transaction-cost economics, the branch of theory concerned with why some exchanges are organised through the market and others inside the firm. Where the resource-based view says which resources matter, transaction-cost economics says why a platform brings them inside through ownership rather than renting them. This note develops that complement, applies it to the build-borrow-buy choice, and tests it against the obvious objection that a long-term contract would be cheaper.

Why firms exist, and why they buy

The question is older than buy-and-build. Coase (1937) asked why firms exist at all, given that markets are supposed to coordinate production efficiently, and answered that using the market is itself costly: there are costs to discovering prices, negotiating, and enforcing contracts, and when those costs are high enough it is cheaper to organise the activity inside a firm under managerial direction. The boundary of the firm sits where the cost of one more internal transaction equals the cost of carrying it out through the market.

Williamson (1979) made that boundary operational. Three features push an exchange out of the market and inside the firm: asset specificity, when the parties must invest in assets specialised to the relationship; uncertainty, when contingencies cannot all be written into a contract; and the hazard of opportunism, when one party can exploit the other once both are committed. The greater these are, the more an arm’s-length contract leaves a firm exposed to hold-up, and the more attractive ownership becomes, because common ownership aligns incentives and lets disputes be settled by fiat rather than by renegotiation.

Build, borrow, or buy

For a growing platform this abstract make-or-buy choice takes a concrete form: build the capability internally, borrow it through a contract or alliance, or buy it through acquisition (Capron & Mitchell, 2012). Their argument is that firms default too readily to one mode, usually the one they know best, and that disciplined growth means matching the mode to the resource. Build when internal resources are close to what is needed; borrow when a capable partner exists and the relationship can be governed by contract; buy when the resource is deeply embedded in another organisation and cannot be cleanly separated from it.

In a platform the choice is recursive, which is what makes it interesting. Capabilities assembled through early add-ons change the calculus for later ones. A capability the platform once had to buy, because it had no foundation to build on, it may later be able to build, because earlier deals supplied the foundation. Conversely, a relationship the platform was happy to borrow through a contract can become specific enough, as volumes grow, that leaving it in the market becomes the riskier option.

Why platforms internalise

Transaction-cost reasoning explains several recurring buy-and-build patterns that a pure synergy story leaves vague. Vertical integration is the clearest. A platform that depends on a distributor or a specialist installer, and that has invested in assets specific to that relationship, faces hold-up risk: the partner can extract value precisely because the platform cannot easily switch. Acquiring the partner removes the hazard by bringing the transaction inside the firm. The same logic explains why platforms internalise scarce capabilities, such as a regional service network or a proprietary product line, rather than contracting for them, once those capabilities become specific to the platform’s strategy and too important to leave exposed to a counterparty’s incentives.

This is also where transaction-cost economics and the resource-based view fit together rather than compete. The resource-based view explains which capabilities are worth controlling, because they are valuable and hard to imitate (Barney, 1991; Dierickx & Cool, 1989); transaction-cost economics explains the governance form, ownership rather than contract, through which the platform secures them. Recent theory casts private equity itself as a specialised intermediary in the market for corporate assets, whose comparative advantage lies in reallocating and governing assets that markets price poorly (Nary & Kaul, 2023), which is a transaction-cost argument about the sponsor as much as about the platform.

A worked illustration: from supplier to subsidiary

Consider a building-products platform that for years has bought a specialised component from an independent regional manufacturer under an ordinary supply contract. Early on this is a textbook borrow: the component is available from several sources, the relationship is non-specific, and a contract governs it cheaply.

As the platform grows, the relationship changes character. The platform redesigns its installed product around this manufacturer’s specification, trains its branch staff on it, and markets it to customers, investments that are specific to this supplier and worth little if the relationship ends. The manufacturer, aware of this, presses for better terms at each renewal. The platform now faces classic hold-up: it is committed, the asset is specific, and the contract cannot anticipate every future contingency. Transaction-cost logic predicts what happens next. The platform acquires the manufacturer, not because the manufacturer is a wonderful standalone business but because internalising the transaction removes a hazard that had become too costly to manage through the market. The borrow became a buy when specificity and uncertainty crossed a threshold.

The objection: wouldn’t a contract be cheaper?

The natural objection is that acquisition is an expensive and clumsy way to solve a contracting problem. Long-term agreements, exclusivity clauses, and well-designed incentives can manage most supplier relationships without the cost and integration burden of ownership, and often they should. Transaction-cost economics agrees: where specificity and uncertainty are low, the market is the right governance form, and a platform that acquires everything it transacts with will overpay and overload its integration capacity.

The objection fails only at the margin transaction-cost economics actually identifies. When assets are highly specific, contingencies cannot be fully specified, and opportunism is a live risk, contracts become incomplete in ways no clause fully closes, and the cost of repeated renegotiation and the exposure to hold-up exceed the cost of ownership. There is also a resource-based limit the contract cannot reach: some of what the platform wants, the tacit know-how and routines embedded in the target, cannot be transferred by contract at all, only by acquiring the organisation that holds them. The discipline cuts both ways, and the failure case proves it. When bidders lack the keystone resources needed to unlock a target’s value, the right move is not to own it; firms that announce deals and then find they cannot create the value divest the target-related resources rather than absorb them (Gibbs et al., 2026). Transaction-cost economics is not an argument for buying; it is an argument for buying only when the market is the costlier option.

Four propositions

Stated plainly, so they can be argued with and tested against cases:

1. Governance, not just resources. The resource-based view says which capabilities to control; transaction-cost economics says when to control them through ownership rather than contract or alliance.

2. Specificity drives internalisation. Platforms acquire, rather than contract, when asset specificity, uncertainty, and the hazard of opportunism make the market exchange too costly to govern.

3. The mode choice is recursive. Capabilities accumulated through early add-ons shift later build-borrow-buy decisions, converting some buys into builds and some borrows into buys.

4. Buy is not the default. Where specificity and uncertainty are low the market is the right form; acquiring everything overloads capacity and destroys value, and the failure case is divestiture.

Why this matters

Read alongside the resource-based view, transaction-cost economics turns buy-and-build from a series of opportunistic purchases into a governed sequence of make-or-buy decisions. It explains why platforms internalise distribution, why a comfortable supplier relationship suddenly becomes an acquisition target, and why the discipline is knowing when not to buy. The companion question, once the platform has decided to acquire, of which target to choose, is the subject of the target-selection note; and the constraint that every internalisation quietly draws down is the absorptive capacity examined later in the Notebook. Ownership solves a governance problem, but it spends the one resource a platform cannot easily replace.

References

Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120.

Capron, L., & Mitchell, W. (2012). Build, borrow, or buy: Solving the growth dilemma. Harvard Business Review Press.

Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405.

Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), 1504–1511.

Gibbs, A., Byun, H., & Lim, K. (2026). Build, borrow, buy… or bail: Divestiture following merger and acquisition deal termination. Strategy Science. Advance online publication.

Nary, P., & Kaul, A. (2023). Private equity as an intermediary in the market for corporate assets. Academy of Management Review, 48(4), 719–748.

Williamson, O. E. (1979).Transaction-cost economics: The governance of contractual relations. The Journal of Law and Economics, 22(2), 233–261.

The Resource-Based View (RBV) of the firm offers the most rigorous available answer. It conceptualises acquisitions not as market-entry moves or scale plays but as the deliberate accumulation of heterogeneous, imperfectly mobile resource bundles under uncertainty. That framing fits buy-and-build unusually well, because in a platform assembled through a sequence of deals, advantage depends far less on any single transaction than on the construction of a resource base over time.

This note positions RBV as the primary analytical lens for value creation in buy-and-build. It also takes the lens seriously enough to test it: to ask where its assumptions hold, where the evidence is thinner than its advocates suggest, and where its sharpest critics are right. Dynamic Capabilities enters later as a disciplined extension rather than a competing framework, and the note’s central claims are stated as explicit propositions at the end. A lens worth using is a lens worth holding to account.

Origins of the Resource-Based View

The intellectual roots of RBV trace to Edith Penrose (1959), who argued that a firm is best understood as a collection of productive resources whose deployment both constrains and enables growth. Growth, in her account, is bounded not by the market but by the firm’s own capacity to absorb and direct new resources, the limit later writers called the “Penrose effect.” That idea is the seed of everything this note argues: a platform can only acquire as fast as it can absorb.

Wernerfelt (1984) formalised the insight, proposing that analysing a firm through its resource positions, rather than its product-market positions, yields different and often sharper strategic conclusions. Four of his propositions bear directly on buy-and-build:

• Firms differ systematically in the resources they control.

• Those differences persist because factor markets are imperfect.

• Acquisitions are purchases of resource bundles, not just businesses.

• Strategy is the balance between exploiting existing resources and developing new ones.

Barney (1986, 1991) then specified the conditions under which resources generate sustained advantage, and later folded in the organisational dimension: the “O” of the VRIO test, meaning the firm’s capacity to actually exploit what it holds (Barney, 1995).

Core assumptions

RBV rests on two foundational assumptions (Barney, 1991). The first is resource heterogeneity: firms in the same industry control different bundles of assets, capabilities, and knowledge. The second is resource immobility: some of those resources are costly to trade, imitate, or redeploy across firms. From these follows the central proposition: sustained competitive advantage arises when a firm controls resources that are valuable, rare, imperfectly imitable, and non-substitutable (the VRIN criteria) and has the organisational capacity to deploy them.

Resources are defined broadly: tangible assets, intangible assets such as reputation and relationships, organisational processes, and embedded knowledge and routines. That breadth matters for buy-and-build, because much of what creates value in a platform sits in non-codified, tacit, or relational assets that are not easily visible in a data room. A target’s management depth, its installed-base relationships, its tacit operating know-how: these rarely appear cleanly on a quality-of-earnings schedule, yet they are often what determines whether an add-on compounds or disappoints.

Acquisitions as resource transactions, and the problem of efficient factor markets

RBV’s most underappreciated contribution is its treatment of acquisitions. Barney (1986) argued that resources are bought and sold in strategic factor markets, the markets for the inputs needed to execute a strategy, and that these markets price resources according to buyers’ expectations of the value they will create. The same target may be worth materially different amounts to different buyers; synergy is not intrinsic to the target but buyer-specific; and overpayment is common when expectations converge or optimism dominates.

This framing aligns closely with observed buy-and-build dynamics. Platforms repeatedly acquire similar firms; value depends on how well a target’s resources complement the existing base; and sequencing matters because earlier acquisitions shape the platform’s capacity to absorb the next one. Read through RBV, a successful buy-and-build assembles complementary resource positions that competitors cannot easily replicate; it is not simply buying cheap assets.

But Barney’s own argument contains the sharpest objection to the whole enterprise. If a strategic factor market is efficient, the price of a resource already impounds its expected value, and the acquirer earns only a normal return: the advantage is competed away at the auction. This is not an abstract worry for buy-and-build. Most targets are sold through organised processes rather than surfacing at random (Boone & Mulherin, 2007), and the more intermediated and competitive the process, the more fully the price should capture the value any disciplined buyer expects to extract. So how can a platform earn excess returns at all?

RBV offers three answers, and buy-and-build relies on all of them. First, value is buyer-specific because the platform can do something with the target that other bidders cannot: a target’s worth depends on the acquirer’s capacity to deploy its own complementary resources against it (Kaul & Wu, 2016). Second, the platform reduces the competition it faces, through proprietary origination and through private targets, which trade at a discount that compensates for greater information asymmetry (Capron & Shen, 2007). Third, and most importantly, the resources that matter most are not for sale in the factor market at all.

Resource accumulation and time

Dierickx and Cool (1989) supplied the refinement that makes RBV usable for buy-and-build. They challenged the assumption that strategically valuable assets can simply be purchased, arguing that the resources that matter most, such as reputation, culture, routines, and integration know-how, are stocks accumulated over time through path-dependent flows. As they put it:

“Strategic asset stocks are accumulated by choosing appropriate time paths of flows over a period of time.”

Three of their mechanisms travel directly into the platform setting. Time-compression diseconomies mean a capability built over five years cannot be bought in one; asset-mass efficiencies mean those who already hold a stock accumulate further stock more cheaply; and interconnectedness means stocks reinforce one another, so an integration capability and a reputation for being a good acquirer grow together. The implication is blunt: not all resources are tradable, acquisition alone does not confer capability, and the order and pacing of deals matter as much as selection itself.

This is why integration capability is, in a buy-and-build platform, a strategic asset in its own right. It cannot be acquired wholesale; it is built through repeated execution, and it is learned deliberately, since firms that codify and accumulate integration experience develop a capability that measurably improves later acquisitions (Zollo & Singh, 2004). The same logic governs what a platform can even recognise as a good target: its capacity to absorb new resources depends on the related knowledge it already holds (Cohen & Levinthal, 1990). Because these accumulated stocks are exactly the resources a competitor cannot buy at auction, they are also the ones the efficient-factor-market objection cannot erode.

A worked illustration: two platforms, one thesis

The mechanism is easier to see in a concrete case. The following is stylised, a composite rather than a specific company, but every move in it is drawn from the dynamics above.

Consider two private-equity platforms pursuing the same thesis: consolidate a fragmented regional market of building-products distributors and installers. Both target the same fundamentals, namely recurring renovation demand, sub-scale independents with no succession plan, and purchasing fragmentation that promises procurement synergy. On paper, their pipelines are nearly identical, and they often bid for the same assets at similar multiples.

Platform A treats its first two acquisitions as capability-building exercises rather than scale plays. It uses them to construct a repeatable template: a shared procurement function, a common branch-operating model, and a standardised onboarding sequence for acquired management. It deliberately holds cadence below what its capital could support until that template works. By the time it accelerates, each new add-on is worth more to A than to any other bidder, because A can drop it onto an operating system that already exists. The same target, valued by a financial buyer with no template, is worth less, because the synergy lives in A’s resource base, not in the target.

Platform B front-loads cadence to put capital to work and show early momentum. Each acquisition is integrated ad hoc, by whichever executive is free. Integration debt compounds: systems never converge, acquired managers leave, and the procurement synergy that justified the premiums is only partly captured. B is not buying worse companies or paying materially more; it is failing to accumulate the capability that converts a target into value. Three years in, the two platforms hold similar assets bought at similar prices and have diverged sharply in performance.

RBV explains that divergence in a way operational accounts cannot. The difference is not asset quality, price discipline, or market timing, since those were comparable. It is the stock of integration capability A accumulated and B did not, and the buyer-specific value that capability created. The advantage was built, not bought.

What the evidence actually says

The illustration is consistent with the empirical record, though that record is more qualified than RBV’s advocates sometimes imply. Capron (1999), studying horizontal acquisitions, found that the redeployment of resources between acquirer and target, in both directions, improves long-term performance, which is the redeployment-and-recombination logic at the centre of this note. Whether acquirers should prefer targets whose resources are similar to their own or complementary to them is contingent on strategic aim (Yu et al., 2016), and a target’s value depends on the acquirer’s capacity to deploy resources against it rather than on standalone quality (Kaul & Wu, 2016).

Honesty requires a caveat the earlier version of this note glossed. The broader claim that resource or strategic “fit” reliably predicts acquisition performance is not settled; the relatedness literature is genuinely mixed, with effects that vary by measure, period, and context. The defensible version is narrower, and is stated as a proposition below: fit matters when it is operationalised as the acquirer’s demonstrated capacity to deploy complementary resources, not as abstract industry similarity.

The private-equity literature adds the setting-specific evidence. Operational engineering, the industry and operating expertise a sponsor applies to its portfolio, is the capability that distinguishes leading firms (Kaplan & Strömberg, 2009), and inorganic growth through add-ons has become central to the PE business model (Hammer et al., 2017). Sponsors can earn above-average returns despite paying premiums for add-ons, through a combination of top-line growth and multiple expansion (Hammer et al., 2022), and the strategy creates value under identifiable industry and platform conditions (Bansraj & Smit, 2017). Recent theory casts private equity as a specialised intermediary in the market for corporate assets, whose selection logic differs systematically from that of strategic acquirers (Nary & Kaul, 2023), which is precisely why a resource-deployment account, rather than a generic synergy account, is the right lens.

The limits of the lens, taken seriously

RBV has real critics, and the strongest of them deserve a hearing rather than a footnote. The most damaging charge is near-tautology: if valuable resources are those that produce advantage, and advantage is the evidence that resources were valuable, the theory risks explaining outcomes by relabelling them (Priem & Butler, 2001). Reviews of the empirical literature reinforce the worry from a different angle, since intangible resources are hard to operationalise, the expected duration of advantage is left vague, and overall empirical support is modest and uneven (Armstrong & Shimizu, 2007; Newbert, 2007). And the efficient-factor-market objection, raised above, never fully goes away.

These critiques bite hardest against predictive uses of RBV, attempts to forecast which firm will win from a checklist of resources. They bite far less against explanatory use, where the goal is to understand the mechanism by which advantage is constructed across a sequence of deals. The defence is not to wave the critiques away but to accept the discipline they imply: specify the resource and the deployment mechanism in advance, rather than inferring them from the outcome. That is the point of stating propositions before observing cases, and it is the standard the rest of this Notebook tries to hold to.

RBV and Dynamic Capabilities: a disciplined extension

Dynamic Capabilities theory (Teece et al., 1997) extends RBV by emphasising a firm’s ability to sense opportunities, seize them, and reconfigure its resource base as the environment changes. Applied carefully it adds genuine explanatory power; applied loosely it becomes an all-purpose hand-wave for “the platform is good at adapting.” Even its proponents worry about this: Eisenhardt and Martin (2000) recast dynamic capabilities as specific, identifiable processes precisely to rescue the concept from tautology, while Helfat and Peteraf (2003) offered the RBV-compatible notion of capability lifecycles to describe how capabilities are founded, developed, and mature over time.

In a buy-and-build context the framework is best held narrowly: as a second-order capability that conditions the effectiveness of resource accumulation, and as the explanation for why some platforms integrate repeatedly while others stall after the first add-on. RBV explains which resources matter and why they may generate advantage; Dynamic Capabilities explains whether the firm can keep redeploying them as complexity rises. Both lenses are needed; neither alone is sufficient; and the second should not be stretched past its evidence to cover gaps in the first.

Four propositions

Stated plainly, so they can be argued with and tested against cases:

1. Buyer-specific value. In buy-and-build, a target’s value is buyer-specific and rises with the platform’s capacity to deploy complementary resources against it, not with the target’s standalone quality.

2. Accumulation, not purchase. The resources most decisive for platform advantage, such as integration capability, reputation, and operating routines, are accumulated through path-dependent execution and cannot be acquired wholesale; they are therefore not competed away in factor markets.

3. Sequencing as a constraint. The order and pacing of acquisitions shape future feasibility; early deals expand or narrow the set of targets a platform can later absorb.

4. Heterogeneity from capability. Performance differences across platforms pursuing nominally identical theses are explained primarily by differences in accumulated capability, not by differences in asset quality, price paid, or market timing.

Why this lens matters

Positioning RBV as the primary lens clarifies several things operational framings tend to obscure: acquisitions are resource bets, not growth events; value creation is buyer-specific and path-dependent; sequencing shapes future optionality; and integration capacity is itself a strategic asset (a claim Integration Capacity Is the Binding Constraintdevelops from the platform side, and Why We Acquire: Motives Before Targets takes forward into how targets are actually chosen).

Used carefully, as an explanatory lens disciplined by propositions rather than a predictive checklist, RBV makes buy-and-build legible as a systematic process of building advantage under constraint. That legibility is what the rest of the Thesis Notebook builds on: Real Options, where the lens strains and reversibility is overstated; Absorptive Capacity, where learning becomes the binding mechanism; and the pre-deal research, where the resource-bundle framing meets selection in practice. My own view, stated once and plainly, is that the resource-based account is the most honest description we have of why two platforms running the same playbook end up so far apart, and that its looseness is a fair price for getting the mechanism right.

References

Armstrong, C. E., & Shimizu, K. (2007). A review of approaches to empirical research on the resource-based view of the firm. Journal of Management, 33(6), 959–986.

Bansraj, D. S., & Smit, H. T. J. (2017). Optimal conditions for buy-and-build acquisitions [Preliminary version]. Erasmus School of Economics.

Barney, J. B. (1986). Strategic factor markets: Expectations, luck, and business strategy. Management Science, 32(10), 1231–1241.

Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120.

Barney, J. B. (1995). Looking inside for competitive advantage. Academy of Management Executive, 9(4), 49–61.

Boone, A. L., & Mulherin, J. H. (2007). How are firms sold?. The Journal of Finance, 62(2), 847–875.

Capron, L. (1999). The long-term performance of horizontal acquisitions. Strategic Management Journal, 20(11), 987–1018.

Capron, L., & Shen, J. C. (2007). Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns. Strategic Management Journal, 28(9), 891–911.

Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35(1), 128–152.

Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), 1504–1511.

Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capabilities: What are they?. Strategic Management Journal, 21(10–11), 1105–1121.

Hammer, B., Knauer, A., Pflücke, M., & Schwetzler, B. (2017). Inorganic growth strategies and the evolution of the private equity business model. Journal of Corporate Finance, 45, 31–63.

Hammer, B., Marcotty-Dehm, N., Schweizer, D., & Schwetzler, B. (2022). Pricing and value creation in private equity-backed buy-and-build strategies. Journal of Corporate Finance, 77, 102285.

Helfat, C. E., & Peteraf, M. A. (2003). The dynamic resource-based view: Capability lifecycles. Strategic Management Journal, 24(10), 997–1010.

Kaplan, S. N., & Strömberg, P. (2009). Leveraged buyouts and private equity. Journal of Economic Perspectives, 23(1), 121–146.

Kaul, A., & Wu, B. (2016). A capabilities-based perspective on target selection in acquisitions. Strategic Management Journal, 37(7), 1220–1239.

Nary, P., & Kaul, A. (2023). Private equity as an intermediary in the market for corporate assets. Academy of Management Review, 48(4), 719–748.

Newbert, S. L. (2007). Empirical research on the resource-based view of the firm: An assessment and suggestions for future research. Strategic Management Journal, 28(2), 121–146.

Penrose, E. T. (1959). The theory of the growth of the firm. Oxford University Press.

Priem, R. L., & Butler, J. E. (2001). Is the resource-based “view” a useful perspective for strategic management research?. Academy of Management Review, 26(1), 22–40.

Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509–533.

Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180.

Yu, Y., Umashankar, N., & Rao, V. R. (2016). Choosing the right target: Relative preferences for resource similarity and complementarity in acquisition choice. Strategic Management Journal, 37(8), 1808–1825.

Zollo, M., & Singh, H. (2004).Deliberate learning in corporate acquisitions: Post-acquisition strategies and integration capability in U.S. bank mergers. Strategic Management Journal, 25(13), 1233–1256.

Neither a comprehensive literature review nor a set of best practices, the Notebook uses established theory to clarify the mechanisms, constraints, and trade-offs that shape buy-and-build as it is actually executed. Each note isolates one academic lens and asks what it helps explain, and where the lens strains when applied to serial acquisition environments.

Three commitments shape the Notebook:

First, buy-and-build is treated as a system, not a deal type. Value creation arises from the interaction of strategy, selection, integration, learning, and governance over time, not from any single acquisition. This is closer to what researchers call an acquisition-programme perspective, in which performance is judged across a sequence of deals rather than one at a time (Laamanen & Keil, 2008).

Second, theory is used as a diagnostic tool, not an answer key. Each lens highlights certain dynamics and obscures others, and the aim is sharper judgment rather than theoretical completeness.

Third, organisational limits are taken seriously. Much of the divergence between intended and realised outcomes in buy-and-build traces to constraints on attention, learning, integration capacity, and sequencing, not to bad strategy.

The seven essays in the Notebook

Resource-Based View Revisited establishes the primary lens. Buy-and-build advantage comes from accumulating and recombining heterogeneous, imperfectly mobile resources under constraint (Penrose, 1959; Wernerfelt, 1984; Barney, 1991), built through path-dependent accumulation rather than residing in the assets themselves (Dierickx & Cool, 1989).

Transaction-Cost Economics and the Build-Borrow-Buy Choice asks why a platform acquires rather than builds or contracts. Ownership wins when asset specificity, uncertainty, and the hazard of opportunism make the market too costly to govern (Coase, 1937; Williamson, 1979), a recursive make-or-buy choice that shifts as the platform grows (Capron & Mitchell, 2012).

The Pre-Deal Phase and Target Selection reframes selection as a resource-matching problem rather than a quality screen (Welch et al., 2020; Kaul & Wu, 2016). In buy-and-build, selection is the first integration decision, embedding feasibility and governance long before diligence begins. (Related: Why We Acquire: Motives Before Targets.)

Deliberate and Emergent: How the Add-On Thesis Forms shows that a platform’s acquisition strategy is neither fully planned nor accidental. It is an umbrella strategy whose specifics emerge as opportunities arrive (Mintzberg & Waters, 1985), best studied as a process rather than a discrete event (Langley, 1999).

Absorptive Capacity under Cumulative Load addresses learning directly. Acquisition experience doesn’t always compound (Cohen & Levinthal, 1990; Zollo & Singh, 2004); under sustained integration pressure, capacity can plateau or degrade, and it, not the supply of deals, is usually the binding constraint. (Related: Integration Capacity Is the Binding Constraint.)

Real Options and Buy-and-Build examines a framework that is frequently invoked but often overstated. Optionality is a useful way to think about staged investment (Kogut, 1991; Smit & Moraitis, 2010), but it overstates reversibility and discretion in serial acquisition, where commitments narrow flexibility faster than financial theory implies (Adner & Levinthal, 2004).

Buy-and-Build in the Literature steps back to assess the field. The academic work is strong at documenting prevalence, drivers, and pricing (Hammer et al., 2017, 2022; Bansraj & Smit, 2017), and weaker at explaining how repeated acquisition remains additive rather than degrading over time.

Taken together, these pieces don’t form a grand theory. They map where buy-and-build tends to hold, strain, or fail when read through the available academic work.

How to read the Notebook

The Notebook isn’t meant to be read linearly or exhaustively, though the order builds: the first five notes construct an account, the sixth tests a rival lens against it, and the last assesses the field. Which lens is most useful usually depends on the reader’s role: investors gravitate toward pricing, selection, and system-level constraints; operators focus on integration, learning, and cumulative load; scholars engage with the boundaries between theory and observed behaviour. What unites these perspectives is a shared problem: how to make sound decisions under uncertainty when organisational capacity, not opportunity, is the binding constraint. (If you’re new here, How to Read This Project lays out the full structure and the recommended reading paths across sections.)

Buy-and-build rewards clarity more than cleverness. The Thesis Notebook is my attempt to use established research to improve the quality of that clarity, while staying honest about where the research itself hasn’t yet caught up to what operators are actually dealing with.

References

Adner, R., & Levinthal, D. A. (2004). What is not a real option: Considering boundary conditions for the application of real options to business strategy. Academy of Management Review, 29(1), 74–85.

Bansraj, D. S., & Smit, H. T. J. (2017). Optimal conditions for buy-and-build acquisitions [Preliminary version]. Erasmus School of Economics.

Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120.

Capron, L., & Mitchell, W. (2012). Build, borrow, or buy: Solving the growth dilemma. Harvard Business Review Press.

Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405.

Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35(1), 128–152.

Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), 1504–1511.

Hammer, B., Knauer, A., Pflücke, M., & Schwetzler, B. (2017). Inorganic growth strategies and the evolution of the private equity business model. Journal of Corporate Finance, 45, 31–63.

Hammer, B., Marcotty-Dehm, N., Schweizer, D., & Schwetzler, B. (2022). Pricing and value creation in private equity-backed buy-and-build strategies. Journal of Corporate Finance, 77, 102285.

Kaul, A., & Wu, B. (2016). A capabilities-based perspective on target selection in acquisitions. Strategic Management Journal, 37(7), 1220–1239.

Kogut, B. (1991). Joint ventures and the option to expand and acquire. Management Science, 37(1), 19–33.

Laamanen, T., & Keil, T. (2008). Performance of serial acquirers: Toward an acquisition program perspective. Strategic Management Journal, 29(6), 663–672.

Langley, A. (1999). Strategies for theorizing from process data. Academy of Management Review, 24(4), 691–710.

Mintzberg, H., & Waters, J. A. (1985). Of strategies, deliberate and emergent. Strategic Management Journal, 6(3), 257–272.

Penrose, E. T. (1959). The theory of the growth of the firm. Oxford University Press.

Smit, H. T. J., & Moraitis, T. (2010). Serial acquisition options. Long Range Planning, 43(1), 85–103.

Welch, X., Pavićević, S., Keil, T., & Laamanen, T. (2020). The pre-deal phase of mergers and acquisitions: A review and research agenda. Journal of Management, 46(6), 843–878.

Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180.

Williamson, O. E. (1979). Transaction-cost economics: The governance of contractual relations. The Journal of Law and Economics, 22(2), 233–261.

Zollo, M., & Singh, H. (2004). Deliberate learning in corporate acquisitions: Post-acquisition strategies and integration capability in U.S. bank mergers. Strategic Management Journal, 25(13), 1233–1256.