Gary Shawhan, Chemark Consulting03.22.22
“Phil, thanks for everything from all your industry friends”
Dr. Phil Phillips: 9/29/37-2/9/22
Bolt-on acquisitions represent an important and growing business strategy. Its definition is somewhat fluid depending on the business circumstances. However, the basic concept involves the acquisition of smaller companies by a larger company or financial entity which is intended to create greater value for the buyer.
Bolt-on acquisitions are differentiated from other M&A activities by the fact that their addition brings important strategic elements from the smaller company to the existing business of the larger one. It strengthens the buyer’s overall market position in one or more ways.
Put another way, its addition is sufficiently distinct from the current business that it brings with it more than just added volume and share gain. The challenge for the buyer is to successfully integrate this company into the existing organization while retaining its unique attributes. These features need to be retained in a reasonable form and not adsorbed into the existing infrastructure of the buyer.
Too often the intended value(s) for a bolt-on acquisition get lost in the integration process.
When the acquisition involves a company that is very similar to the business or business unit of the buyer, it is not considered as bolt-on. Instead, it is referred to as a tuck-in acquisition. For the most part, such companies can be folded into the existing organization relatively easily. The identity of the acquired company and its brand (in this scenario) is not retained but phased out within a relatively short period following its acquisition.
For tuck-in acquisitions, the strategic intent is to strengthen the buyer’s competitive market position in an existing market space through share gain and at the same time reducing overall operating costs.
Financial buyers gain value by adding additional pieces to the portfolio creating a higher collective value as they position the resulting combined business for resale. In either case, such acquisitions dissolve themselves into the larger company within a relatively short period of time.
Table 1 summarizes the more important strategic reasons for pursuing this M&A approach.
Intent is Not Always Reality
The challenges that present themselves, when integrating a smaller company into a larger one, are varied, often complex and very individual to the specific company being acquired. For bolt-on acquisitions, the buyer’s intent is (or should be) to preserve or protect the key value elements obtained from the company they are acquiring.
Unfortunately, even with the best intentions, this does always work out as originally conceived or planned. The challenges of integrating a smaller company into a larger one and then trying to retain the unique values of the acquired company going forward are immense. This is especially true with multinational corporations acquiring smaller if not much smaller companies.
Accounting practices and IT systems almost immediately present themselves as operational issues that must be reconciled in favor of the buyer. Software systems are often dissimilar and need to be transitioned to a common business platform as soon as possible. This is not just for accounts payables and receivables but also for order entry, shipping, inventory, etc. Accomplishing this, while minimizing the impact this may have on customers and suppliers, is a difficult task at best.
Sales, marketing, customer service and technical support people are normally at the heart of a smaller company’s strengths in the markets they serve. Such individuals are the face of this company and a key bridge to their customers. Fundamentally this represents an important part of the goodwill that the buyer paid for in the acquisition.
Differences in compensation plans, territory overlaps, the need for territory re-alignments and changes in market responsibility are among the many issues that have to be addressed early-on in the transition. Protecting and maintaining as much of the individuality of the acquired company in market facing activities is key to retaining the values that were originally envisioned. Unfortunately, many things often get in the way of actually accomplishing this objective.
The Impact of COVID on the Bolt-on M&A Process
The global COVID crisis, which began during Q1 2020, started with temporary closing of some factories or a significant reduction in the output of others. These actions were taken as a way to isolate and contain the virus. Shortages began to occur in the marketplace for many different goods and services as a result. Markets and geographies that were highly dependent on imports for raw materials or components used to manufacture finished goods found themselves in unfamiliar territory.
After two years, supply chain disruptions, shipment delays and reduced rates of production of various raw materials or components have not subsided. They continue to impact many businesses and at all levels of the value-chain. One consequence of this situation has been significant changes in supply chain management practices and sourcing tactics. Another is in the rational applied to the M&A process.
There is no question that the pace at which acquisitions of smaller companies by large ones continues to increase despite the pandemic. The COVID pandemic has altered the strategic rationales applied to the types of companies being targeted. This includes a re-prioritization of the traditional business objectives (Table 1) that traditionally accompany a bolt-on acquisition strategy. The reasons behind changes in priorities for acquisitions include those summarized in Table 2.
Backward integration has become an increasingly important consideration for businesses that previous had relied on traditional sources of supply for raw materials (or components). In many cases, these were offshore sources that manufactured products at a much lower cost than could be obtained from on-shore alternatives.
In a number of situations, these suppliers represented a single source of supply. In other cases, they represented a majority supplier to the manufacturer. This practice, which had worked well for a long period of time, created a high level of dependence accompanied by the risks it represents. As the COVID pandemic proceeded, companies manufacturing raw materials or finished goods that had supply commitments to offshore customers were now unable to meet all their obligations.
In summary, bolt-on acquisitions, which are synergistic with the present business but contribute to a strong competitive position in the marketplace, continues to be an important element in the strategic plan of larger companies. The types of companies targeted for acquisition and the elements of strategic importance to the organization has, however, undergone changes as a result of the pandemic.
Table 1: Key Reasons for Targeting Bolt-on Acquisitions
• Access to market segments or niches not served or well served currently
• Channels-to-market position is stronger, differentiated in certain market areas, geographies
• Add an established or leading Brand to elevate their competitive position
• Manufacturing infrastructure and/or technical support capabilities are distinct and complimentary to the current business
• Geographic coverage is strong in regions that are not well served currently at the present time
• The company’s technology contains valuable IP. Product lines expand and compliment the buyer existing product offerings
• Sales coverage/technical support, business/customer relationships in certain market segments, or regions are strong and improve buyer’s competitive position
• Accelerate time-to-market avoiding the costs associated with launching a greenfield effort
Table 2: Impacts of the Pandemic on M&A Strategies
• Allocations of raw materials creating reduced output from existing sources of supply
• Force Majure on contracts due to an inability to supply
• Increased prices as demand began exceeding supply
• Territorial preferences to support in-country businesses first, limiting export volumes of certain products
• Commodity and/volume markets, dependent on low-cost imported products/raw materials, now scrambling to find alternative sources
• Major delays in the transportation of goods via ocean going vessels as well as for land-based freight, trucking
• An increasingly complicated supply chain where demand exceeds the ability to provide timely delivery of good and services. This has added significant costs to manufactured goods
Dr. Phil Phillips: 9/29/37-2/9/22
Bolt-on acquisitions represent an important and growing business strategy. Its definition is somewhat fluid depending on the business circumstances. However, the basic concept involves the acquisition of smaller companies by a larger company or financial entity which is intended to create greater value for the buyer.
Bolt-on acquisitions are differentiated from other M&A activities by the fact that their addition brings important strategic elements from the smaller company to the existing business of the larger one. It strengthens the buyer’s overall market position in one or more ways.
Put another way, its addition is sufficiently distinct from the current business that it brings with it more than just added volume and share gain. The challenge for the buyer is to successfully integrate this company into the existing organization while retaining its unique attributes. These features need to be retained in a reasonable form and not adsorbed into the existing infrastructure of the buyer.
Too often the intended value(s) for a bolt-on acquisition get lost in the integration process.
When the acquisition involves a company that is very similar to the business or business unit of the buyer, it is not considered as bolt-on. Instead, it is referred to as a tuck-in acquisition. For the most part, such companies can be folded into the existing organization relatively easily. The identity of the acquired company and its brand (in this scenario) is not retained but phased out within a relatively short period following its acquisition.
For tuck-in acquisitions, the strategic intent is to strengthen the buyer’s competitive market position in an existing market space through share gain and at the same time reducing overall operating costs.
Financial buyers gain value by adding additional pieces to the portfolio creating a higher collective value as they position the resulting combined business for resale. In either case, such acquisitions dissolve themselves into the larger company within a relatively short period of time.
Table 1 summarizes the more important strategic reasons for pursuing this M&A approach.
Intent is Not Always Reality
The challenges that present themselves, when integrating a smaller company into a larger one, are varied, often complex and very individual to the specific company being acquired. For bolt-on acquisitions, the buyer’s intent is (or should be) to preserve or protect the key value elements obtained from the company they are acquiring.
Unfortunately, even with the best intentions, this does always work out as originally conceived or planned. The challenges of integrating a smaller company into a larger one and then trying to retain the unique values of the acquired company going forward are immense. This is especially true with multinational corporations acquiring smaller if not much smaller companies.
Accounting practices and IT systems almost immediately present themselves as operational issues that must be reconciled in favor of the buyer. Software systems are often dissimilar and need to be transitioned to a common business platform as soon as possible. This is not just for accounts payables and receivables but also for order entry, shipping, inventory, etc. Accomplishing this, while minimizing the impact this may have on customers and suppliers, is a difficult task at best.
Sales, marketing, customer service and technical support people are normally at the heart of a smaller company’s strengths in the markets they serve. Such individuals are the face of this company and a key bridge to their customers. Fundamentally this represents an important part of the goodwill that the buyer paid for in the acquisition.
Differences in compensation plans, territory overlaps, the need for territory re-alignments and changes in market responsibility are among the many issues that have to be addressed early-on in the transition. Protecting and maintaining as much of the individuality of the acquired company in market facing activities is key to retaining the values that were originally envisioned. Unfortunately, many things often get in the way of actually accomplishing this objective.
The Impact of COVID on the Bolt-on M&A Process
The global COVID crisis, which began during Q1 2020, started with temporary closing of some factories or a significant reduction in the output of others. These actions were taken as a way to isolate and contain the virus. Shortages began to occur in the marketplace for many different goods and services as a result. Markets and geographies that were highly dependent on imports for raw materials or components used to manufacture finished goods found themselves in unfamiliar territory.
After two years, supply chain disruptions, shipment delays and reduced rates of production of various raw materials or components have not subsided. They continue to impact many businesses and at all levels of the value-chain. One consequence of this situation has been significant changes in supply chain management practices and sourcing tactics. Another is in the rational applied to the M&A process.
There is no question that the pace at which acquisitions of smaller companies by large ones continues to increase despite the pandemic. The COVID pandemic has altered the strategic rationales applied to the types of companies being targeted. This includes a re-prioritization of the traditional business objectives (Table 1) that traditionally accompany a bolt-on acquisition strategy. The reasons behind changes in priorities for acquisitions include those summarized in Table 2.
Backward integration has become an increasingly important consideration for businesses that previous had relied on traditional sources of supply for raw materials (or components). In many cases, these were offshore sources that manufactured products at a much lower cost than could be obtained from on-shore alternatives.
In a number of situations, these suppliers represented a single source of supply. In other cases, they represented a majority supplier to the manufacturer. This practice, which had worked well for a long period of time, created a high level of dependence accompanied by the risks it represents. As the COVID pandemic proceeded, companies manufacturing raw materials or finished goods that had supply commitments to offshore customers were now unable to meet all their obligations.
In summary, bolt-on acquisitions, which are synergistic with the present business but contribute to a strong competitive position in the marketplace, continues to be an important element in the strategic plan of larger companies. The types of companies targeted for acquisition and the elements of strategic importance to the organization has, however, undergone changes as a result of the pandemic.
Table 1: Key Reasons for Targeting Bolt-on Acquisitions
• Access to market segments or niches not served or well served currently
• Channels-to-market position is stronger, differentiated in certain market areas, geographies
• Add an established or leading Brand to elevate their competitive position
• Manufacturing infrastructure and/or technical support capabilities are distinct and complimentary to the current business
• Geographic coverage is strong in regions that are not well served currently at the present time
• The company’s technology contains valuable IP. Product lines expand and compliment the buyer existing product offerings
• Sales coverage/technical support, business/customer relationships in certain market segments, or regions are strong and improve buyer’s competitive position
• Accelerate time-to-market avoiding the costs associated with launching a greenfield effort
Table 2: Impacts of the Pandemic on M&A Strategies
• Allocations of raw materials creating reduced output from existing sources of supply
• Force Majure on contracts due to an inability to supply
• Increased prices as demand began exceeding supply
• Territorial preferences to support in-country businesses first, limiting export volumes of certain products
• Commodity and/volume markets, dependent on low-cost imported products/raw materials, now scrambling to find alternative sources
• Major delays in the transportation of goods via ocean going vessels as well as for land-based freight, trucking
• An increasingly complicated supply chain where demand exceeds the ability to provide timely delivery of good and services. This has added significant costs to manufactured goods
