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The Power of Small Bolt-on and Tuck-in Acquisitions

The Power of Small Bolt-on and Tuck-in Acquisitions

Show Notes Of Podcast

What is a Bolt-on Acquisition?

A bolt-on acquisition is the expression used when a larger company acquires a significantly smaller company with a strategic motive. The strategic motive here is important: although bolt-on acquisitions are usually cash-flow generative, their income is usually small enough relative to the acquirer that it’s not the main motive for the acquisition.

Tens of thousands of M&A transactions are conducted globally every year and yet, usually only a few dozen obtain any media coverage.

What of the rest?

Well, a good proportion of these deals are either tuck-in or bolt-on acquisitions. These are smaller deals that are less attention-grabbing than the so-called mega-deals. Unlike many of the larger deals, they’re also more often value accretive. In this article, we look at both tuck-in and bolt-on acquisitions and the value that they can unlock for companies which are active in M&A.

Let's start with definition, It will help to understand the difference between ‘tuck-ins’ and ‘bolt-ons’ from the outset.

Tens of thousands of M&A transactions are conducted globally every year and yet, usually only a few dozen obtain any media coverage.

What of the rest?

Well, a good proportion of these deals are either tuck-in or bolt-on acquisitions. These are smaller deals that are less attention-grabbing than the so-called mega-deals. Unlike many of the larger deals, they’re also more often value accretive. In this article, we look at both tuck-in and bolt-on acquisitions and the value that they can unlock for companies which are active in M&A.

Let's start with definition, It will help to understand the difference between ‘tuck-ins’ and ‘bolt-ons’ from the outset.

What is a Bolt-on Acquisition?

A bolt-on acquisition is the expression used when a larger company acquires a significantly smaller company with a strategic motive. The strategic motive here is important: although bolt-on acquisitions are usually cash-flow generative, their income is usually small enough relative to the acquirer that it’s not the main motive for the acquisition.

Bolt-on Acquisition

Private equity companies typically employ bolt-on acquisitions to add value to their portfolio companies before disposing of them. These are usually synergistic (i.e. both companies benefit from the transaction), and may add one or all of:

  • new customers,
  • new product lines,
  • new geographies
  • or even attractive intellectual property to the acquiring company.

What is a Tuck-in Acquisition?

Tuck-in acquisitions are largely the same as bolt-on acquisitions with the main exception being that the smaller company is completely absorbed into the buyer: whereas many bolt-on acquisitions may retain their names and identities, a tuck-in acquisition loses its corporate identity and structure to become an indistinguishable part of the larger firm.

Tuck-in Acquisition

Examples of Bolt-on Acquisition Strategies

As mentioned, private equity companies commonly apply bolt-on acquisition strategies for their portfolio companies. The larger company, referred to as the “platform” company, acquires smaller, complementary assets which add value before the divestiture. This type of acquisition is extremely common among consumer goods companies, where a new resource such a food category or brand (to take two examples) can add clear value to the platform.

This is as true for independent consumer goods companies as it is for private equity companies The ubiquitous Coca-Cola fridge that adorns the vast majority of food retailers in the world contains an assortment of waters, juices, energy drinks and Coca-Cola’s main line of products. Invariably, these products started out as independent brands before being acquired by Coca-Cola. (or ‘bolted on’ to the main brand, if you will).

This is a long-held strategy of Coca-Cola that goes back over half a century. The well-known Minute Maid juice brand was acquired in 1960, for example. The strategy continues today, with the company invariably making purchases of popular juice brands in countries, complementing its main lines. Another example is provided by its 2014 acquisition of Monster Beverages, producer of Monster energy drinks, which gave Coca-Cola access to a fast-growing market.

A further example - although this time in home heating - is provided by the Irish company, Glen Dimplex. Glen Dimplex has used a bolt-on acquisition strategy consistently over the course of 50 years to become the largest home heating company in the world by revenue, despite starting as a small, independent manufacturer with no ascertainable competitive advantage over any of the other players in its industry aside from a well-composed M&A strategy.

Read also
How to Acquire a Company in 8 Steps [Useful Guide]

Examples of Tuck-in Acquisitions Strategies

Tuck-in acquisitions are more seen in the energy and technology sectors, where either a resource (such as upstream or downstream assets) in the case of the energy companies or new capabilities (such as expertise or intellectual property) in the case of the technology companies. These acquisitions then become almost completely absorbed within the larger company, usually with very little way to an outsider looking in to know if the acquisition was a success or not.

One of the most well-known (not to mention, successful) tuck-in acquisition strategies is that which is employed by Apple. Apple makes enough acquisitions every year for them to warrant their own wikipedia page. The example of Apple is a good illustration of a tuck-in strategy at work. Note how many of the companies it acquires are never ‘heard of’ again; they simply become part of Apple. Interestingly, the Wikipedia entry for its acquisitions even has a “derived product” column, showing which Apple product the acquisition ultimately contributed to.

Furthermore, it’s a reasonable bet that of all the transactions listed every year on transaction databases like CapitalIQ, the biggest cohort of deals by industry is in one of energy, minerals or hospitality.

Why?

Because the biggest firms in these industries are constantly acquiring new resources - oil wells and small exploration companies in the case of energy companies, mines (and sometimes mining technology) in mineral exploitation companies and portfolios of properties in the case of hospitality companies. In all three cases, the assets are usually ‘tucked in’ to become part of the acquirer, becoming a footnote in corporate history.

Read also
Share Acquisition vs Asset Acquisition: Which is Better?

The Benefits of Bolt-on and Tuck-in Acquisitions

The main benefit of both types of acquisitions outlined is that they can be thought of as small, relatively low-risk additions to a bigger company. Over time, the compounding effect of adding so many value-generating assets is that the acquirer’s value should have grown significantly. Other benefits include:

  • It’s typically easier to integrate smaller companies than larger ones
  • There’s a bigger universe of smaller companies to choose from
  • Smaller companies are often cheaper, not just in absolute terms, but in terms of multiples (i.e. price to EBITDA) making them more accretive to value
  • These acquisitions offer a fast way to allow a company to grow geographically

…And the Risks?

No transaction in M&A is without its risks. While bolt-on and tuck-in acquisitions can add significant value, there are always a risk that a deal can fail, dragging value down with it. So, as positive as this article has been about these acquisitions, in the interests of balance, it is worthwhile to note their inherent risks:

  • There is a tendency among business acquisition managers to look at small acquisitions as real options to pursue certain strategies in the future; this can be an expensive way to acquire real options and a fast way to destroy value if the acquisition isn’t integrated immediately
  • Small acquisitions do not mean due diligence is any less important; multiple small acquisitions increase the due diligence burden on the buyer
  • Similarly, the value created by many small firms – particularly in services – is generated through their founder manager (his/her industry relationships and expertise), so value can be lost in small acquisitions by not understanding how much value is really what the founder manager has generated on their own.

Conclusion

Bolt-on and tuck-in acquisitions offer a proven method for companies to add value over a longer period of time. Although many appear insignificant at the time of acquisition - particularly in terms of their financial results - the continued addition of their resources and capabilities allows the buyer to grow at a rate above and beyond what would be possible organically.

It should come as no surprise then, that both are strategies which have been employed by almost all of the world’s biggest corporations at some stage in their history.

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Tens of thousands of M&A transactions are conducted globally every year and yet, usually only a few dozen obtain any media coverage.

What of the rest?

Well, a good proportion of these deals are either tuck-in or bolt-on acquisitions. These are smaller deals that are less attention-grabbing than the so-called mega-deals. Unlike many of the larger deals, they’re also more often value accretive. In this article, we look at both tuck-in and bolt-on acquisitions and the value that they can unlock for companies which are active in M&A.

Let's start with definition, It will help to understand the difference between ‘tuck-ins’ and ‘bolt-ons’ from the outset.

What is a Bolt-on Acquisition?

A bolt-on acquisition is the expression used when a larger company acquires a significantly smaller company with a strategic motive. The strategic motive here is important: although bolt-on acquisitions are usually cash-flow generative, their income is usually small enough relative to the acquirer that it’s not the main motive for the acquisition.

Bolt-on Acquisition

Private equity companies typically employ bolt-on acquisitions to add value to their portfolio companies before disposing of them. These are usually synergistic (i.e. both companies benefit from the transaction), and may add one or all of:

  • new customers,
  • new product lines,
  • new geographies
  • or even attractive intellectual property to the acquiring company.

What is a Tuck-in Acquisition?

Tuck-in acquisitions are largely the same as bolt-on acquisitions with the main exception being that the smaller company is completely absorbed into the buyer: whereas many bolt-on acquisitions may retain their names and identities, a tuck-in acquisition loses its corporate identity and structure to become an indistinguishable part of the larger firm.

Tuck-in Acquisition

Examples of Bolt-on Acquisition Strategies

As mentioned, private equity companies commonly apply bolt-on acquisition strategies for their portfolio companies. The larger company, referred to as the “platform” company, acquires smaller, complementary assets which add value before the divestiture. This type of acquisition is extremely common among consumer goods companies, where a new resource such a food category or brand (to take two examples) can add clear value to the platform.

This is as true for independent consumer goods companies as it is for private equity companies The ubiquitous Coca-Cola fridge that adorns the vast majority of food retailers in the world contains an assortment of waters, juices, energy drinks and Coca-Cola’s main line of products. Invariably, these products started out as independent brands before being acquired by Coca-Cola. (or ‘bolted on’ to the main brand, if you will).

This is a long-held strategy of Coca-Cola that goes back over half a century. The well-known Minute Maid juice brand was acquired in 1960, for example. The strategy continues today, with the company invariably making purchases of popular juice brands in countries, complementing its main lines. Another example is provided by its 2014 acquisition of Monster Beverages, producer of Monster energy drinks, which gave Coca-Cola access to a fast-growing market.

A further example - although this time in home heating - is provided by the Irish company, Glen Dimplex. Glen Dimplex has used a bolt-on acquisition strategy consistently over the course of 50 years to become the largest home heating company in the world by revenue, despite starting as a small, independent manufacturer with no ascertainable competitive advantage over any of the other players in its industry aside from a well-composed M&A strategy.

Read also
How to Acquire a Company in 8 Steps [Useful Guide]

Examples of Tuck-in Acquisitions Strategies

Tuck-in acquisitions are more seen in the energy and technology sectors, where either a resource (such as upstream or downstream assets) in the case of the energy companies or new capabilities (such as expertise or intellectual property) in the case of the technology companies. These acquisitions then become almost completely absorbed within the larger company, usually with very little way to an outsider looking in to know if the acquisition was a success or not.

One of the most well-known (not to mention, successful) tuck-in acquisition strategies is that which is employed by Apple. Apple makes enough acquisitions every year for them to warrant their own wikipedia page. The example of Apple is a good illustration of a tuck-in strategy at work. Note how many of the companies it acquires are never ‘heard of’ again; they simply become part of Apple. Interestingly, the Wikipedia entry for its acquisitions even has a “derived product” column, showing which Apple product the acquisition ultimately contributed to.

Furthermore, it’s a reasonable bet that of all the transactions listed every year on transaction databases like CapitalIQ, the biggest cohort of deals by industry is in one of energy, minerals or hospitality.

Why?

Because the biggest firms in these industries are constantly acquiring new resources - oil wells and small exploration companies in the case of energy companies, mines (and sometimes mining technology) in mineral exploitation companies and portfolios of properties in the case of hospitality companies. In all three cases, the assets are usually ‘tucked in’ to become part of the acquirer, becoming a footnote in corporate history.

Read also
Share Acquisition vs Asset Acquisition: Which is Better?

The Benefits of Bolt-on and Tuck-in Acquisitions

The main benefit of both types of acquisitions outlined is that they can be thought of as small, relatively low-risk additions to a bigger company. Over time, the compounding effect of adding so many value-generating assets is that the acquirer’s value should have grown significantly. Other benefits include:

  • It’s typically easier to integrate smaller companies than larger ones
  • There’s a bigger universe of smaller companies to choose from
  • Smaller companies are often cheaper, not just in absolute terms, but in terms of multiples (i.e. price to EBITDA) making them more accretive to value
  • These acquisitions offer a fast way to allow a company to grow geographically

…And the Risks?

No transaction in M&A is without its risks. While bolt-on and tuck-in acquisitions can add significant value, there are always a risk that a deal can fail, dragging value down with it. So, as positive as this article has been about these acquisitions, in the interests of balance, it is worthwhile to note their inherent risks:

  • There is a tendency among business acquisition managers to look at small acquisitions as real options to pursue certain strategies in the future; this can be an expensive way to acquire real options and a fast way to destroy value if the acquisition isn’t integrated immediately
  • Small acquisitions do not mean due diligence is any less important; multiple small acquisitions increase the due diligence burden on the buyer
  • Similarly, the value created by many small firms – particularly in services – is generated through their founder manager (his/her industry relationships and expertise), so value can be lost in small acquisitions by not understanding how much value is really what the founder manager has generated on their own.

Conclusion

Bolt-on and tuck-in acquisitions offer a proven method for companies to add value over a longer period of time. Although many appear insignificant at the time of acquisition - particularly in terms of their financial results - the continued addition of their resources and capabilities allows the buyer to grow at a rate above and beyond what would be possible organically.

It should come as no surprise then, that both are strategies which have been employed by almost all of the world’s biggest corporations at some stage in their history.

M&A software

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