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Bolt-On Acquisition

Updated on May 23, 2024
Article byJyotsna Suthar
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Bolt-On Acquisition?

Bolt-on acquisition is a takeover strategy. The larger corporation purchases a smaller company that operates in the same industry. The acquisition is undertaken to increase the acquirer’s portfolio’s market share and strategic value. It is also called a tuck-in acquisition.

Bolt-On Acquisition

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This strategy is simpler than other mergers and acquisitions (M&A) processes. That is, it involves less paperwork. Usually, such deals do not feature competing bids. So, theoretically, it is an opportunity for startups to team up with industry giants. But, on the flip side, it can lead to clashes and cultural differences between both firms.     

Key Takeaways

  • Bolt-on acquisition enables big private companies to acquire (purchase) smaller ones. Before merging, both firms compete in the same sector.
  • It is a subtype of add-on acquisition—undertaken by private equity firms. Since the acquired company is small, legal formalities associated with the deal are fewer.  
  • The deal’s documentation includes an introduction, transaction details, forward-looking statements, details of the parties, non-GAAP disclosures, and cautionary notes.
  • In most tuck-in acquisitions, a large corporation tries to add patented technology belonging to a smaller firm.

Bolt-On Acquisition Strategy Explained

The Bolt-on acquisition is a strategy a big firm uses to take over a small firm operating in the same industry. In a way, the target firm was a former competition. The parties involved in this acquisition exchange technology, culture, and ethics. It is also called a tuck-in acquisition.

For example, Coca-Cola adopted a tuck-in acquisition strategy to capture other beverage brands. Consequentially, they controlled the largest market share in the beverage segment.

Before venturing further, let us define a takeover. A takeover is buying a target firm with or without the agreement of the target’s management. The acquirer wins the bid and buys a major stake in the target firm. Typically, larger companies try to acquire smaller companies.

Takeovers are common—often disguised to look like friendly mergers. It could be a mutual agreement or a hostile battle. In a hostile takeover, the acquirer secretly buys the shares of non-controlling shareholders from the open market. Gradually the acquirer takes hold of more than 50% of the target’s stocks, gaining control. The target firm’s management and board are unaware of such developments.

Firms go for a tuck-in acquisition deal to achieve a positive internal rate of return (IRR). After taking over, the big firm gets new customers, product lines, and outlets operating in new locations. As a result, risks associated with tuck-in acquisitions are fewer than other strategies.

Once the smaller firm is acquired, its operations are clubbed along with the bigger firm. This includes employees, technology, rules, and objectives. During these mergers, the acquirer needs to ensure sufficient cash flow. In addition to the acquisition costs, the acquirer is now paying for additional employees, locations, etc. As a result, cash crunches are common among tuck-in acquisitions.

Bolt-On Acquisition Deal Contents

Let us look at bolt-on acquisition deal contents:

Bolt-On Acquisition template

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  • Introduction: The acquirer defines a purchase agreement and the exact acquisition cost. This information is conveyed to the investors via a press release. In addition, the press release outlines the transaction date, terms, and conditions.  
  • Transaction Highlights: The transaction highlights major metrics—future cash flows, internal rate of return (IRR), balance sheet ratios, capital efficiencies, shareholder benefits, and synergies.
  • Acquirer Details: The next section briefly discusses the platform company (acquirer). In addition, it mentions the purpose of the deal and the objectives of the new (combined) entity.
  • Forward-Looking Statements: The forward-looking statement defines future business consequences arising from the deal—tuck-in acquisition and other post-acquisition and management risks. The involved parties must comply with Sections 27A and 21E of the Securities Act of 1933. They must also abide by the Securities Exchange Act of 1934.
  • Non-GAAP Disclosures: This section highlights non-GAAP disclosures adopted by the new entity. It includes metrics like adjusted operating cash flow, free cash flow yield, and free cash flow.
  • Cautionary Notes: The SEC (Securities Exchange Commission) orders involved parties (acquirer and target) to disclose complete information to the shareholders. In addition, the involved firms must file Form 10K with the SEC. The firms can only mention verified reserves (that are proven or allocated).

Example

Let us look at a few examples to understand bolt-on acquisition better.

Coca-Cola is a major beverage brand having the highest market share. Coca-Cola has made over seven acquisitions in the beverage industry.

In 1960, Coca-Cola acquired the European beverage brand, ‘Minute Maid.’ This deal paved the way for the brand to start another product line (soft drinks). As a result, it increased sales from $1.51 million in 2005 to $1.70 in 2009.

Consequentially, Coca-Cola launched two new products under the acquired name. Similarly, Coca-Cola acquired an Indian brand in 1993—Thumbs Up. More recently, Coca-Cola acquired the British coffee brand Costa Coffee. This deal structure was finalized on August 21, 2018.

Bolt-On Acquisition vs Add-On vs Tuck-In

Let us look at bolt-on acquisition vs. add-on vs. tuck-in comparisons to distinguish between them.

 Bolt-OnAdd-OnTuck-In
MeaningIt allows big firms to acquire small firms that operate in the same industry.A private equity firm acquires a small-sized firm.In a tuck-in acquisition, the acquired company does not retain its management post-merger.  
PurposeTo enhance their portfolio and increase market share. To collaborate target firm operations with the acquirer operations.To increase market share and customer base.
Risk level  Low risk.Medium to high risk.Risk of losing brand loyalty.

Frequently Asked Questions (FAQs)

Why do companies buy bolt-on acquisitions for technology?

Large corporations acquire smaller firms to access different technology and patent knowledge. The acquirer can opt for organic growth, or they can speed up the process via mergers and acquisitions.

What are the advantages and disadvantages of bolt-on acquisitions?

The Bolt-on strategy requires less paperwork than other takeover strategies. The acquirer can easily acquire small, potentially growing companies using this method. Also, this deal structure facilitates lower acquisition costs. On the flip side, the larger firm risks its reputation and brand perception.

Are roll-on and bolt-on acquisitions the same?

No. the latter look for companies operating in the same industry. In roll-on acquisition, the acquirer purchases niche companies.

Can platform companies hide figures in the bolt-on acquisition agreement?

No, platform firms (acquirers) cannot hide any reserves or figures pertaining to the deal. Both parties must disclose all transaction details to shareholders. The SEC ensures transparency.

This has been a guide to what is Bolt-On Acquisition. We explain it in detail with its example, deal content, and compare it with add-on and tuck-in. You can learn more about it from the following articles –

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