What is a tuck-in acquisition? And what is a bolt-on acquisition? If you’re considering acquiring a company, understanding the difference between bolt-on vs. tuck-in acquisitions is critical to the overall strategy. Both strategies have advantages and disadvantages – and that can make or break which companies you decide to target.
According to McKinsey’s Private Equity Annual Review, nearly $3.5 trillion in private equity acquisition deals were completed in the past year – with assets under management (AUM) totaling $9.8 trillion.
In the world of acquisition deal structures, there are two strategies for organizations and firms to consider: tuck-ins and bolt-ons. Let’s take a closer look at bolt-on and tuck-in acquisitions and explore the key differences between the two.
What Is a Tuck-in Acquisition?
A tuck-in acquisition occurs when a larger company acquires and integrates a smaller company into its organization.
The acquirer’s platform consists of the technological structure, inventory and distribution systems, and all the business’s operational aspects. The target company is “tucked” into the existing platform, becoming part of the larger company.
This kind of acquisition is sometimes called an “inclusive acquisition.” No matter what you call it, it can be a great way for a large company to grow its product offerings or geographic reach.
Acquiring organizations are often backed by private equity firms. PE firms provide the capital power and strategic knowledge to close large acquisitions seamlessly.
The Benefits of Tuck-in Acquisitions
There are several key benefits of tuck-in acquisitions, including:
- Speed: The integration of tuck-in acquisitions can happen quickly because the companies aren’t combining two businesses that operate in entirely different verticals – a major advantage when time is of the essence.
- Efficiency: A tuck-in acquisition tends to be more efficient; there’s no need to duplicate efforts when integrating the target company’s operations into the acquirer’s platform.
- Gain intellectual property: While the acquired company may be smaller, it could mean gaining access to intellectual property, which could be highly valuable to the larger company.
- Increase market share: When two companies in the same industry come together, they increase their reach within that market.
The ability to add new products or services to your portfolio is another major advantage. But what about when you want to add more extensive new capabilities, products, or services?
In that case, a bolt-on acquisition might be the way to go.
What Is a Bolt-on Acquisition Strategy?
A bolt-on acquisition occurs when a company acquires another company that offers complementary products, services, or technologies. The target company “bolts on” to the acquirer, adding new capabilities and extending the reach of the business so it can expand into new markets.
Bolt-on acquisitions are a great way for a company to grow its capabilities and profitability. For example, a company that manufactures electric vehicles might acquire a company that makes batteries. It’s “bolting on” the ability to produce batteries and vertically integrating the business.
The Benefits of Bolt-on Acquisition Deal Structures
Here are some of the benefits of a bolt-on acquisition strategy:
- New capabilities: The most obvious benefit of a bolt-on acquisition strategy is the ability to add new capabilities to your business. Imagine the potential for growth if your company can suddenly offer new, complimentary products or services.
- New markets: A bolt-on acquisition can help you enter new markets and expand your reach by capitalizing on the areas in which the other company already operates.
- Increased efficiency: Sometimes, a bolt-on acquisition can help you achieve greater efficiency in your operations. For instance, if you acquire a company that makes a product you originally outsourced, you can begin manufacturing it in-house.
- Higher value: A bolt-on acquisition can increase your company’s value, making it more attractive to potential investors and partners.
There are plenty of benefits if you opt for a bolt-on acquisition, but there are challenges, too. Bolt-on acquisition deal structures often mean greater complexity and risk because you’re integrating two different companies’ operations.
Learn How to Effectively Source Bolt-on or Tuck-in Acquisitions With udu
Tuck-in and bolt-on acquisition strategies are effective ways for businesses to scale their operations.
Are you deciding between bolt-on vs. tuck-in acquisitions? The right choice depends on what you want to gain from the acquisition. A bolt-on might be the way to go if you want to expand your product offerings or enter new markets.
But a tuck-in could be the better option if you want to increase market share quickly. No matter which strategy you pick, make sure you fully understand the potential benefits and challenges before moving forward with an acquisition deal.
Now that you can confidently answer questions like “What is a tuck-in acquisition?” and “What is a bolt-on acquisition strategy?” it’s time to discuss how to best source acquisitions with your PE firm.
udu helps private equity firms build lists of potential acquisition targets using AI. Our platform uses the latest in innovative data harvesting, natural language processing (NLP), and machine learning (ML) systems to give PE firms instant access to the most up-to-date market information.
With a few clicks, you can start scanning web-connected data sources to find the most promising companies that fit your strategic objectives. And you can use those data points to inform your investment strategy and better support your team during the due diligence process.If you’re ready to take your bolt-on or tuck-in acquisition deal sourcing to the next level, udu is the answer.
Schedule a demo today to learn more about how our AI-powered platform can help you source and close more desirable deals.