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How Bolt-on Acquisitions Can Create Value for Shareholders

What is a Bolt-on Acquisition?

A bolt-on acquisition (also known as an “add-on” or “follow-on”) is when a larger company acquires a smaller company with a strategic goal in mind. 

Often this smaller company will be in the same niche as the larger company, allowing it to “bolt” onto the larger one’s operations without a lot of reconfiguring or turnover.

This differentiates it from other types of M&A (merger and acquisition) deals, which can take place between similarly sized companies. Those often come with more complications, and can be disastrous if they don’t work out. 

While bolt-on acquisitions can often increase the larger company’s profits, cash flow isn’t always the main motivation.

Gaining new customers, products, or intellectual property are all reasons a company may choose to acquire a smaller one. 

Example of a Bolt-on Acquisition

Many private equity firms use bolt-on acquisitions to increase the size and reach of their portfolio companies. The company profiled in this article, for example, used a bolt-on acquisition last year to increase the value of its portfolio company. 

In August, Kongsberg acquired MultiCam, which also makes and distributes precision-cutting machine tools. This allowed Kongsberg to grow in size and reduce the number of its competitors with minimal effort.

Kongsberg is based in Norway, Belgium, and the Czech Republic, while MultiCam is a Dallas-based company. The bolt-on acquisition not only expands Kongsberg’s size, but its reach, from Europe into North America.

So What Happens to the Smaller Company?

A big company absorbing a small one often carries aggressive connotations — your first thought may have been a giant fish eating a smaller one. 

But usually, a bolt-on acquisition benefits both parties. The firm being bought retains its name and structure, and gains new resources and scale from the larger company — while the buyer benefits from the new market, product or customers offered by the bolted-on firm.

How Do Shareholders Benefit From Bolt-on Acquisitions?

With increased growth comes increased profits. With increased profits come increased dividends.

Each bolt-on acquisition a company completes lowers the number of competitors in the market. Bolt-ons can also allow a company to enter new markets, gain new customers, and offer new products with less effort than other routes. 

If done correctly, this will increase the profits of the company doing the bolting, thus increasing shareholder returns.

How Does it Differ From a Tuck-In Acquisition?

While companies acquired in a bolt-on acquisition keep their name and company identity, tuck-in acquisitions completely absorb the smaller firm into the buyer — thus “tucking” them into the larger company structure, instead of “bolting” them on, where they can still be seen.

Companies use tuck-in acquisitions when they already have the operational requirements in place for the business, and the smaller firm’s structure is no longer needed. 

A firm may opt for a bolt-on instead if the company being acquired has built a solid reputation for itself, and the buyer wants to keep the brand name intact. Companies often start to bolt-on smaller ones when they feel they can’t get any larger on their own.

Example of a Tuck-In Acquisition

Major technology firms tuck-in small startups all the time. While bolt-ons can be great for both companies, tuck-ins often shutter the smaller business, after a payout to those at the top. 

Apple is a common example of a big player that does a lot of tuck-ins. Just last year it acquired Primephonic, a classical music streaming service. That company no longer exists, and Apple plans to integrate its structure into its own streaming service, Apple Music.

A Growing Trend

In its most recent annual breakdown, private equity database Pitchbook found that bolt-ons hit an all-time high of 72.8 percent of all U.S. buyouts in 2021. 

The company found that North American PE-backed bolt-ons rose from 1,277 in 2010 to 3,169 in 2019 as general partners have sought less risky investments in an ever-changing and uncertain world.

Final Thoughts

Private equity firms often employ bolt-on acquisitions with their portfolio companies to increase their value. This allows the firm to sell its portfolio company at a higher price than it paid, when it eventually moves on.

Mergers and acquisitions always carry an element of risk. And the buyer must do its due diligence to make sure that the smaller firm is a strategic fit. 

But bolt-on acquisitions allow larger companies to create value for shareholders faster and more easily than by developing new products or launching new offices in other regions on their own.

BIZCATALYST 360°
BIZCATALYST 360°https://www.bizcatalyst360.com/about/
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