Weighing The Pros And Cons Of Bolt-On And Tuck-In Acquisitions

August 22, 2020

While only a few dozen M&A transactions get media coverage, more than tens of thousands of them are conducted globally every year—now even more so with the onset of the coronavirus.

Most of these transactions and deals are tuck-in and bolt-on acquisitions. These categories of M&A are value accretive because they can unlock a company’s potential in numerous ways.

Let’s take a look at what tuck-in and bolt-on acquisitions are, the differences between them, and some common pros and cons of opting for these transactions.

Understand the basics of tuck-in and bolt-on acquisitions can make it easier to keep up with your business sale specialist and business acquisition broker.

What Is A Bolt-On Acquisition?

A bolt-on acquisition is when a larger company acquires a significantly smaller company with a strategic motive. Bolt-on acquisitions are usually cash-flow generative, but the income of the smaller organization is lower relative to the acquirer—hence, this isn’t their main motive for the acquisition.

Private equity companies employ bolt-on acquisitions to add value to their portfolio companies before disposing of them. These are typically synergistic as both companies benefit from the transaction. The acquisition results in the addition of new customers, new product lines, new geographies, and even intellectual property.

What Is A Tuck-In Acquisition?

Tuck-in acquisitions are similar to bolt-on acquisitions. The main difference is that the smaller company is completely absorbed into the buyer, which may not be the case in bolt-on acquisitions. Sometimes, bolt-on acquisitions allow the smaller company to retain its name and identity. A tuck-in acquisition end with the smaller company losing its corporate identity and structure to become an indistinguishable part of the bigger firm.

Why Opt For Bolt-On And Tuck-In Acquisitions?

The main benefit of both types of acquisitions is that they’re small and relatively low-risk additions to a bigger company. The combined effect of adding so many value-generating assets significantly increases the acquirer’s value over time.

A few other benefits include:

They’re easier as it’s typically simpler to integrate smaller companies than larger ones.
The larger firm can choose from a pool of several smaller companies.
Smaller companies are often cheaper in terms of multiples, which makes them more accretive to value.
These acquisitions fast-track a company’s geographical growth.

The Risks Of Bolt-On And Tuck-In Acquisitions

M&As aren’t without their risks. While it’s true that bolt-on and tuck-in acquisitions can add value, there’s always a risk that a deal can fail and drag the value down.

A few inherent risks include:

Some business acquisition managers tend to look at small acquisitions as real options for pursuing certain strategies. However, this could be an expensive way to acquire real options and may destroy value if the acquisition isn’t integrated immediately.
Several small acquisitions increase the due diligence burden on the buyer.

Conclusion

Bolt-on and tuck-in acquisitions are a proven method for companies to add value. Although they may appear insignificant at the time of the acquisition, they add resources and capabilities to the company that allows the buyer to grow organically.

Gulfstream Mergers & Acquisitions has successfully conducted countless mergers and acquisitions for numerous clients since 1993 in South Carolina, New Jersey, Ohio, Pennsylvania, Georgia, Florida, Massachusetts, and other areas of the US.

The leading M&A advisory firm has decades of experience in the business that maximize the deal’s value to ensure your company’s success in the future.