Tuck-in and bolt-on acquisitions are both examples of a type of merger that is common in the business world. Both integration have been successful throughout many different sectors of the business world. Generally, consumer products are more likely to be bolt-on acquisitions, while the tech sector employs more tuck-in acquisitions. Knowing the differences of each type is paramount, as we’ll explore below.
What Is a Bolt-On Acquisition?
A bolt-on acquisition deal refers to when a private equity firm attaches a smaller company to a larger “platform” company. This platform company will have a strong presence in the market with an intact and maneuverable management structure, economies of scale, infrastructure and all of the things that are necessary for organic and acquisition growth. The bolt-on company will have features that appeal to the platform company, such as complimentary services, technology or strategic relationships with customers or geographies that are of use to the platform.
Typically, the bolt-on will have very little financial or administrative power and will excel more in operations or in customer relationships, and the platform company, or acquiring company, can use its existing power and infrastructure to fill in the gaps that the bolt-on lacks. The owners of these bolt-ons are usually willing to pass the admin and management reins over to the platform in exchange for flexing its own muscles in core competencies.
What Is a Tuck-In Acquisition?
A tuck-in acquisition is very similar to a bolt-on acquisition, as the platform company absorbs the smaller company, integrating all of its systems, management, infrastructure, inventory and distribution, technology and other operational aspects of the business. In a tuck-in acquisition, as opposed to a bolt-on acquisition, the smaller company does not retain any of its own management and is merely assimilated by the platform company. This is usually done by the platform company to grow the company’s market share or customer base.
The ideal tuck-in acquisition is one in which the smaller company has a valuable asset, such as a technology or customer base, but does not have the growth prospects to exploit it to their advantage.
Differences Between a Bolt-On and Tuck-In Acquisitions
The main difference is the extent to which the smaller company is absorbed into the larger. In a tuck-in acquisition, the smaller company is almost entirely absorbed into the larger acquiring company, turning over all its operational aspects, including distribution, inventory and technology. The acquired company doesn’t maintain an individual structure.
Bolt-on acquisitions may retain some aspects of its structure such as its brand name, its customer relationships, its technological infrastructure and its distribution channels. Quite often, the bolt-on company has reached the maximum potential it can on its own and can only grow further by being acquired.
Both types of acquisitions are beneficial to the platform company, and both can be beneficial to the bolt-on or tuck-in as well, as those smaller companies may be at the limits of what they can achieve. As with any acquisition, both of these do have risks associated with them.
Here is a summary of the differences:
- Involves the complete absorption of a smaller company by a larger company.
- The acquiring company already has all the operational aspects needed for a successful business, including distribution systems, inventory, and technology structure.
- The smaller company does not retain its individual structure after the acquisition.
- Usually funded by private equity firms and often involves companies with a big disparity in size but similar business models and industries.
- Typically conducted for revenue growth and to expand into new markets, not necessarily for strategic reasons.
- Examples of resources smaller companies may bring include knowledge, proprietary software, people, patents, or a strong customer list.
- Common in the technology sector, with corporate entities absorbing start-ups regularly.
- The acquired company becomes a subsidiary or “bolted on” to the larger company.
- The acquired entity may continue to operate as an individual department or division under the umbrella of the larger company.
- The brand of the acquired company may continue to function under its own name, depending on the specifics of the acquisition.
- Often occurs for similar reasons as tuck-in acquisitions, but the acquired company remains intact to some degree.
- Good for both companies involved, as the larger entity gains by expanding its market, product line, or capability, and the smaller organization gains access to economies of scale and new resources.
- Often involves companies that have reached the highest point in the market they can on their own.
Benefits and Risks of Bolt-On Acquisitions
Generally speaking, the risks of bolt-on acquisitions tend to be less than their tuck-in counterparts. In addition, the cumulative effect of multiple bolt-on acquisitions can enable a company to grow more rapidly than a tuck-in acquisition. Additional benefits include:
- Speed of process: Bolt-on acquisitions generally require less work to integrate, as the target companies involved are usually smaller.
- Pricing power: Smaller companies may have fewer competitors looking to acquire them, so the price may be lower.
- Willingness to be purchased: Smaller companies are more likely to consider being acquired by a larger company.
There are also some cons to bolt-on acquisitions. These include:
- Justifying the expense: Acquiring any company involves expenses beyond the price of the smaller company; adding the additional costs to the mix may result in a less-than-predicted ROI, or requiring a longer time or lower expectations for the ROI to fully be realized.
- Integration incompatibilities: As the target company isn’t fully integrated into the platform company, there may be big differences between the two. These include corporate culture, disparate systems, conflicting management styles and financial concerns.
Benefits and Risks of Tuck-In Acquisitions
There are many pros and cons to performing tuck-in acquisitions. The pros include:
- Obtaining new resources: Naturally, acquiring a company brings all of the assets of the target company into the platform company. These resources can include a customer base and name-brand recognition.
- Higher market share: A common move for companies striving to increase their market dominance, typically in high-competition industries, where multiple companies are fighting for the same market share. Simply by absorbing the target company, the platform company has instantly increased its market share.
- Increased ROI: In many instances, the platform company can count on increased return on investment (ROI) after the tuck-in acquisition is completed. However, in most cases, the increased ROI is a long-term strategy, not something that can instantly be counted on.
On the flip side, there are, of course, some cons to using the tuck-in acquisition strategy. These include:
- Cost basis: Acquiring a competitor can be costly, so due diligence is required to project the future ROI against the cost of the M&A. In addition to the cost of the acquisition, all other costs (legal, bank and regulatory fees, commissions, etc.) must be added to the equation.
- Incompatible synergies: If the two companies end up being incompatible or when the process is rushed without the proper due diligence performed, the acquisition has a high probability of becoming a failure.
Real-World Examples of Bolt-On and Tuck-In Acquisitions
Coca-Cola’s successful bolt-on acquisitions include many different beverage brands, such as Minute Maid orange juice, Monster Energy Drinks and Honest Tea, among many others. All these brands were well established before being acquired by Coke (KO). Similarly, Coke’s largest competitor, PepsiCo Inc. (PEP) has followed suit, adding Tropicana, Naked Juice and Gatorade to its portfolio. Pepsi has ventured in the food business as well, and its holdings now include Frito-Lay snack products as well as Quaker Oats.
Tech companies tend to employ the tuck-in over bolt-on strategy when it comes to acquisitions:
- Microsoft, the tech giant whose flagship products are Windows and Office, has built up quite a portfolio of tuck-in acquisitions. These include Hotmail, Skype and the hardware division of Nokia, making all of these formerly independent companies Microsoft brands.
- Apple’s tuck-in acquisitions include Siri (voice recognition), Beats (audio products) and Shazam (music and image recognition).
- Google has acquired Picasa (image organization), YouTube (video sharing website) and Fitbit (wearable technology).
Why a VDR is an Invaluable Tool for Acquisition
Virtual data rooms are crucial for the mergers and acquisition process to flow smoothly, efficiently and safely, no matter what type of acquisition deal is being built. The virtual data room is populated with the selling company’s important documents: contracts, intellectual property, employee information, financial information and more. It keeps track of all transactions and actions, making audit logs of all access points. This allows the selling company to share all of this information with the platform company and any interested private equity firms in a controlled manner that preserves confidentiality.
Interested in understanding how Caplinked’s VDR can make your bolt-on or tuck-in acquisition more seamless? Start your 14-day free trial now.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Corporate Finance Institute – Tuck-In Acquisition – Overview, Advantages and Disadvantages
Capital.com – Bolt-On Acquisition