Acquiring value – using bolt-on acquisitions to enhance shareholder returns

Is this the right time to be considering a bolt-on?

Recent research by Boston Consulting Group demonstrated that acquisitions made in a weak economy materially outperform their peers completed in a strong economy. Debt retrenches, prices decline and value creation opportunities arise. Ernst & Young’s recent analysis also indicated that bolt-on acquisitions outperformed all other categories of deal in respect of returns to shareholders. History tells us that now is the time to be considering bolt-on acquisitions.

Bolt-on acquisitions – where to start?

Warren Buffet, the acclaimed US fund manager, once said, “Price is what you pay. Value is what you get”. In other words, focus on the underlying value of your investment, not the price. This sentiment holds true for bolt-on acquisitions. The starting question should always be the same – will this acquisition enhance shareholder value? If the answer is yes, then take a further look at the opportunity. Do not be sucked into pursuing a bolt-on acquisition for the wrong reasons. These are well documented through the history of quoted businesses and include anything from hubris, to boredom and most commonly to distract shareholders from shortcomings in the core business. There is a long list of (mostly famous) examples that demonstrate why acquisitions made for these reasons will always fail. A bolt-on is ultimately worth considering if the value attributable to shareholders will increase as a result of doing the deal.

Drivers of value creation

There are plenty of valid reasons for pursuing a bolt-on acquisition that can lead to shareholder value being enhanced. It may be to access new suppliers, to acquire new customer relationships, to enter into new products or sectors or to exploit operating synergies that could be realised by combining the two businesses. Any one of these reasons, or even better in combination, may provide the opportunity to improve returns to shareholders over time.

Successfully incorporating bolt-on acquisitions will also provide your business with critical mass. This will typically broaden the list of potential acquirors for your business, as well as provide greater access to the debt markets, which in combination should help to improve the returns to shareholders.

Considerations when pursuing a bolt-on opportunity

Assuming that the board of directors and shareholders agree that the opportunity will enhance shareholder value, the responsibility lies with the executive team to “get the deal done”. The devil, as always, will be in the detail. Based on our experience at Key, here are a few things to consider when reviewing your bolt-on acquisition process:

1. Planning – a bolt-on acquisition is like any other deal process, except you have the added complexity of integrating the target with your existing business. A thorough plan for both the deal and integration is essential if you are to capture value and not waste valuable management time.
2. Resourcing and distraction – acquiring and integrating a business is a distraction to your management team and consumes time and energy (usually more than you think). Consider introducing new skills and resource, either temporarily or on a permanent basis, to help you manage this challenge
3. Integration – to extract the synergies you were seeking, and to achieve maximum value when it is time to sell your business, the target needs to have been integrated within your existing business. The scale of the integration varies from deal to deal, but achieving your “target operating model” is essential. Bolt-on acquisitions that fail usually do so because of a botched integration
4. Culture – bringing two businesses together involves combining or changing cultures. The most successful integrations typically work on the basis of taking “best of both” from target and acquiror.

Bolt-ons in a Covid-19 world

Acquisition opportunities have been low on the agenda for most companies over the past three months. However, a number of sectors have demonstrated their resilience to the current crisis. Whether you believe in a “V-shaped” dip, or a more pronounced recession, a downturn is coming and for robust companies with access to liquidity there will be opportunities to make acquisitions. Deal processes will invariably have to adapt, not least to accommodate social distancing. However, businesses that are willing to be flexible should be able to navigate through these challenges.

Our experience at Key

The Key team have 150 years of combined experience in the private equity sector. Over the past 15 years we have been investing in the UK SME market and have successfully supported and helped businesses to develop, grow and thrive in both good and bad times. During this period our portfolio companies have completed well over a dozen bolt-on acquisitions. These acquisitions have resulted in superior returns for shareholders at the point of exit.

Through a combination of Key’s dedicated origination function, and our extensive network within the corporate finance community across the UK, we have successfully sourced bolt-on acquisitions for our portfolio companies. We have also supported management teams through both the deal and integration processes. We are a supportive and committed investment partner looking to work with high growth UK companies.

Foot notes:

1. The 2019 M&A Report: How to Master M&A in a Downturn – September 2019
2. Why bolt on acquisitions are better poised for value capture in life sciences – Ernst & Young – May 2019