Over the last few years, financial news has seemingly been dominated by mergers and acquisitions reports. A few recent examples include Andrew Nikou’s OpenGate OpenGate acquiring Multicam and MSQ expanding its portfolio with the addition of Elmwood.
While each acquisition contains unique terms and conditions, these major business moves can be classified into several broad types. One increasingly popular approach is known as a “bolt-on acquisition.”
If you stay up on the latest financial headlines, then you have likely encountered this term. However, you may not be quite sure what it is, how it works, or why bolt-on acquisitions have become so prevalent in recent years.
What Is a Bolt-on Acquisition
According to Divestopedia, a bolt-on acquisition refers to “a company that is added by a private equity (PE) firm to one of its platform companies.”
The private equity firm will form a partnership with another company that has a foothold in a specific market that the PE wants to get involved in. The larger entity already has the infrastructure and capabilities necessary to be active in their industry.
The larger company will seek “bolt-on” acquisition opportunities in order to supplement its existing capabilities. For instance, they may perform a bolt-on acquisition of a technology firm that offers cutting-edge software so that they can integrate these solutions into their current processes and operations.
Startups are the most common target for bolt-on acquisition efforts. Larger entities will often seek to acquire these companies, as they have minimal infrastructure and income. These small businesses are usually at a crossroads and are unable to fuel their own growth due to a lack of capital, scaling issues, or another underlying barrier.
The bolt-on acquisition is a mutually beneficial agreement. The larger organization acquires access to the smaller entity’s intellectual property and customer base. The smaller company gains access to the resources and financial backing needed to become more profitable.
Bolt-on vs. Tuck-in
The phrases “tuck-in acquisition” and “bolt-on acquisition” are frequently used interchangeably. While these two acquisition models are similar, there are a few notable distinctions between them.
Investopedia states that a tuck-in acquisition involves “a larger company completely absorbing another, usually smaller, company and integrating it into its own platform.” Larger entities use both bolt-on and tuck-in acquisitions to expand their portfolio and gain access to additional resources or customers.
However, the key difference between the two methods is that the smaller entity is absorbed completely during a tuck-in acquisition. The company being absorbed will adopt the larger organization’s name and business structure. During many bolt-on acquisitions, the small company may continue operating under its original name.
Benefits of a Bolt-on Acquisition
Bolt-on acquisitions can have tremendous benefits for both the PE firm and the smaller entity. A few of these benefits include:
Acquiring New Clients
Generally, the smaller organization that is being acquired does not have enough cash flow to make a significant financial impact on the larger entity. However, bolt-on acquisitions do allow the larger organization to access the smaller company’s customers.
For instance, let’s say that a large technology firm operates in multiple states across the western U.S. This organization wants to begin expanding, starting with the state of Texas.
Instead of pursuing new clients organically, they can engage in a bolt-on acquisition with a tech company that already has strong customer relationships within the state.
Obtaining Intellectual Property
Bolt-on acquisitions are also an effective way of acquiring intellectual property. Large organizations can perform a bolt-on acquisition of an emerging startup in order to obtain new software, technologies, manufacturing methods, etc. These larger entities will often attempt to acquire the property before it is taken to market.
In exchange, they will provide the smaller company with additional funding and resources so that they can transform the property into a usable product or service.
Overcoming Growth Barriers
Bolt-on acquisitions are appealing to the smaller entities as well. They can gain access to additional resources while still maintaining their identity. This tactic allows them to overcome growth barriers while also continuing to acquire new clients within their market.
While they will be acting as an agent of the larger organization, the smaller company will still reap financial benefits.
Reducing Administrative Burdens
Bolt-on acquisitions also allow the smaller entity to shed administrative burdens. The larger partner will often take over corporate management responsibilities while the smaller entity focuses on core competencies and nurturing customer relationships.
As you can see, bolt-on acquisitions offer significant benefits to both the PE firms and the smaller organizations involved.
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