Bolt-On or New Platform: How Synergies Differ

As a professional with 29 years’ experience in M&A corporate development, financial operations, and management, Paul Tennola, CFO of Paynet, is an expert when it comes to M&A. In addition to his experience with Paynet, Paul has worked with TransUnion, Wolters Kluwer, and SunGard. He has looked at over 1000 companies, successfully leading and closing more than 50 transactions. He believes M&A is a great way to augment growth.

When comparing bolt-on transactions to new platforms, Paul shares important considerations. With a bolt-on, you have domain expertise, an understanding of the customer segment, language, technology, and user interface experience. In short, it’s usually a faster and tighter process. Paul says a key question to ask is, “Can we make this fit into our platform so it’s seamless at the end for the customer?”

With new platforms, Paul explains how crucial it is to go in eyes wide open. He encourages asking three questions: (1) How full is my plate?, (2) Do I have the expertise?, and (3) How long is this going to take? On average, acquiring a new platform requires much broader diligence.

Whether you’re managing a bolt-on transaction or a new platform, you can realize two types of synergies: revenue and operational. Paul states, “You really need a broader view on ‘How do I layer in all these synergies?’ And you do it right. You do it right from the business standpoint, but also from the moral standpoint.” He outlined the importance of being transparent with employees to mitigate concerns. “You don’t want [employees] continually looking over their shoulder saying, ‘Am I next?’”

Paul believes at the end of the day, “You are not just acquiring product, you’re acquiring people.” Because of this, you must consider integration early in the process.

Although M&A teams often come in with lengthy diligence checklists, the vast majority of questions fall into several large categories across finance, operations, sales, and technology. Paul highlights the criticality of Quality of Earnings. “Make sure you can at least validate the current financial health.” He also recommends reviewing software: “Does it work? Do they own the IP? Is it scalable?”.

It is also important to consider cultural fit. As Paul warns, “You can’t force two cultures together.” At times, the difference in culture is too big. During a smaller deal, Paul discovered a mismatch with management when conversations became petty. The team determined it would be too detrimental to find replacement management, so they walked away from the deal.

“You can’t force two cultures together.”

At other times, sellers get stars in their eyes during diligence. They decide they want 15-20% more without reason. In these situations, Paul tells them, “We came to an agreement on the structure of the price.” According to Paul, it’s always harder for the seller. They may not be prepared for diligence, so they get scared because they cannot confirm what they’ve done in their business. Obviously that’s not always the case. According to Paul, “No company is perfect and that’s why you have diligence to mitigate that. The deals that you like are the ones [where the seller] tries to work with you.’”

When it comes to international transactions, diligence is different. “You’re not just doing diligence on that company, you’re doing diligence on an entire market.” You need market intelligence and research to back up what you are doing. The integration plan is much more robust as the result of different languages, cultures, and country-specific rules.

In deals that make it to the negotiation phase, Paul recommends taking a measured approach. As a strategic buyer, you cannot give up synergies to the seller. Paul typically starts the negotiation stating, “Look guys, this is a dance. To be transparent, what we’re giving you is what we think is market value.” He aims to stay within 25% of that. “If you go 50% in one way or the other, it can actually be insulting to the other side and they might not take you seriously.”

Paul believes you are as good as your last transaction. You need to follow a proper framework. Skipping steps leads to miscalculations. “The key is to make sure you really understand the market, the strategy, and all the various players.”


Listen to the full podcast here. This Podcast was brought to you be DealRoom, a technology company that helps corporations on both the buy and sell side transform their outdated M&A process. See for yourself what a modern deal process looks like.

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