14 Feb Bolt-On Acquisitions: Growth From an Established Industry Platform
Various inorganic methods exist for corporate growth. Industry consolidation using a roll-up strategy with add-on/bolt-on/tuck-in acquisitions is at least one method used ad-nauseum by all the most well known private equity groups and strategic buyers. The concept is relatively simple in overall design and description, but difficult in implementation and execution. The premise is simply this:
- Find a disparate or fragmented industry.
- Source a gem among stones in said industry (a.k.a. platform-co.)
- Partner with and/or acquire all or a portion of said platform
- Institutionalize systems, processes and personnel within the platform
- Use the platform as the basis for adding on other smaller, generally less-sophisticated acquisition targets within the same space
- Follow a typical buy-side M&A process
- Rinse & repeat
Establishing a Platform
Platforms do not grow up overnight. A true “platform” company is one whose systems, processes and personnel are fully prepared to assimilate additional acquisitions, preferably in a condensed time period. Being a true platform does not necessarily mean the business is a market leader in the true sense of the word, but it does mean the company is likely a head or two above all others in a highly dispersed and fragmented field. Moreover, the platform company has built the right systems to ensure any future organic growth can be seamlessly added without a hiccup to the operations. This means the business structure, the right technology (finance/accounting, ERP, etc.) and the right people under the right management structure. If the right recipe is not in place, a “platform,” in the truest sense, has not yet been established. If this is the case, the industry is likely still experiencing growing pains and more investment is required to establish a platform worthy of inorganic growth.
Typically private equity groups will either make minority/majority investments in platform companies with the intent to use the platform as a source for later bolt-on/tuck-in acquisitions over a set three to five year window, before eventually exiting. The structure of platform deals can be as varied as the imagination is wild. The certainty remains, however: a platform is a prerequisite for performing an industry-consolidating roll-up via bolt-on acquisitions.
We’ve spoken before about industry consolidation and trends in various industry life-cycles. True industry consolidation is more than just making acquisitions for acquisitions’ sake. A true roll-up scenario involves adding incremental value through platform systems and processes than can be translated across smaller, tuck-in acquisitions of companies horizontal or vertical to the platform. Additionally, acquisitions must be assessed from the 1+1=3 perspective. That is, “does this acquisition add more than the incremental value gained from it’s compartmentalized revenues or is there something more?” And we are not just talking about elimination of redundancies across the firm (or, more bluntly put: layoffs). Typical acquisitions involve collating all the bolt-on targets under the single brand of the parent company. Otherwise, the acquisitions may be seen simply as silo purchases within the same industry with no real value creation.
In most instances, such bolt-on or tuck-in acquisitions are smaller and less sophisticated companies. However, sometimes smaller firms may have talent, tools and intellectual property that can be easily ported to the parent, creating a synergistic scenario. In fact, some may significantly add value to the platform in very real ways.
A few questions to ask when pursuing a bolt-on acquisition strategy:
- How robust are the systems and processes of the parent?
- Can the systems and processes of the platform be easily and quickly implemented to a target acquisition? Will this add value?
- Will the tuck-in acquisition’s revenues be protected? Are seller’s notes and earnouts needed to protect them?
- What is the M&A experience of the integration team? If light, how quickly can they move down the learning curve?
While prognosticators often tout the poster children in these types of scenarios, there are many instances where acquirers have crashed and burned in doing M&A in an effort to consolidate an industry. In other words, this path is often fraught with extreme peril. Those with well-developed mandate, who know what they want and hire the quality advisors to assist capture that value in the process.