The strategic value of bolt-on acquisitions following a successful Search Fund transaction

Multiple Arbitrage

The fundamental reason behind most acquisitions when an exit of some kind is the ultimate goal is the concept of multiple arbitrage. Put simply, this is the practise of increasing the value of a company without having made any operational improvements to it. This is achieved by acquiring a company for a lower multiple than you believe the consolidated group will be able to exit for. For example, if you believe that as a larger group, you should be able to exit for 10x EBITDA but can make an acquisition of a company for 6x EBITDA, then the new company instantly creates value for you to the tune of the delta between the two multiples. 

Done correctly, multiple arbitrage can be used to generate a positive impact even before making a single cost cut or realising any synergies. However, it does hinge on finding the right company/companies to acquire and being able to accurately perceive valuation.

Geographical reach

Bolt-on acquisitions can be an effective way to rapidly unlock new geography. This could be small-scale, for example, a printing company based in the south of England looking to quickly expand into a northern city using an acquisition to ensure it has an instant client base and strong local experience.

At the other end of the scale, it could be used to gain access to a new country or continent. We regularly work with US and European-based companies looking to enter the UK market via acquisition. This helps to sidestep the initial set-up costs and other barriers to entry (local knowledge, relationships etc) that come with establishing in a new territory.

Additional service lines or specialisms

Another benefit of bolt-on acquisitions is the ability to add a complimentary specialism to your offering to make it a more attractive overall proposition. As a general rule, the more complete your offering, the lesser the chance that customers will churn (as it removes a potential reason for churning – a competitor providing a superior offering). Rather than taking the risk of building up a new specialism from scratch in an uncertain economic environment, it is now more appealing than ever to take a shortcut with an acquisition.

This is particularly common in the IT Managed Service space. We have worked on numerous transactions where a platform company will look to add additional specialisms (cyber security, additional system specialism etc). In doing this, it is important to target established businesses with a proven track record in delivering the specialism you would like to add.

Increasing market share of existing service lines

Sometimes an acquirer will simply look to make an acquisition to strengthen an existing service line, whether this be through increasing the client book, manpower or general market share. A simple play for a recruitment firm for instance could see it look to acquire a competitor’s client book and recruiter roster to instantly improve market share.

Particularly in the current environment, smaller competitors may be more inclined to consider joining a larger firm to help them avoid running into financial difficulties or indeed to keep up with regulatory/compliance requirements.

Synergies

Synergies refer to potential benefits that arise from combining two companies. The two main forms of synergies which have the greatest impact to EBITDA are cost synergies and revenue synergies. Cost synergies are realised through eliminating duplicated functions (typically administrative functions) or through achieving greater economies of scale through the enhanced buying power of the new larger entity. Revenue synergies can be generated through cross selling opportunities to the target’s client list or indeed by offering a comprehensive, complementary package to customers which makes them less likely to churn.

Conclusion

Growing the acquired company is the ultimate goal for any searcher, whether traditional model or self-funded. It is particularly important for traditional searchers given it is necessary to hit the KPI targets required to unlock the final third of equity they could be entitled to. 

In this growth mission bolt on acquisitions could prove a valuable tool. It is therefore important that searchers are aware of the strategy and keep it in their thinking both pre and post their initial acquisition. 

If you have any questions about bolt-on acquisitions and would like to discuss them in more detail then please do get in touch. Our transaction services team has great experience in assisting companies with making single or multiple bolt on acquisitions.