A business’ value is a difficult figure to pin down, but a crucial one for business stature and growth – not just for investors, but for the sectors in which they sit and the entire UK market. Private equity firms have an active hand in growing the value of businesses in which they invest, using a variety of tools to maximise value. One such tool is the ‘bolt-on acquisition’, a transaction of growing import in a volatile post-pandemic market.
What is a bolt-on acquisition?
Put simply, a bolt-on acquisition refers to the purchasing of a smaller business by a larger one, in service of a greater aim relating to the trade value of the larger business. A private equity firm with active investment in a larger ‘platform company’ might seek to raise its strategic value and hence improve value for investors. This makes the business more lucrative, and more appealing to other industry figures.
The business being ‘bolted on’ would typically be a small business with minimal infrastructure, but relatively high profitability. It might be a business that enjoys high consumer satisfaction, or one with reliable and robust market presence. Crucially, it would be a business at a crossroads with regards to growth; a business without the means to meaningfully expand, but one that would benefit from outsourcing administration to larger outfits in service of better client-facing operation.
Bolt-on acquisitions are relatively common routes to adding value in business transactions, but nonetheless complex processes to oversee. Private equity firms need to adhere to key corners of business regulation and compliance to properly effect a bolt-on transaction, but the effort is typically worthwhile for all parties.
UK acquisition trends
Bolt-on acquisitions have surged in popularity in the aftermath of the coronavirus pandemic, as business and equity firms sought more aggressive growth strategies out of a stagnant market. According to market statistics, bolt-on transactions more than doubled in comparison to pre-pandemic levels.
The sectors that saw particularly significant activity in this regard were the TMT (Technology, Media and Telecom) and business services sectors, where explosions in start-up activity no doubt fuelled the growth in availability of smaller businesses with essential bolt-on value.
The advantages of bolt-on acquisition
Bolt-on acquisitions are an all-round boon for businesses being acquired, the acquiring party and the private equity firms brokering the transactions. The bolt-on business gains access to advanced infrastructure and funding without taking on its own debt burden; the acquiring business’ value grows according to the potential of the bolt-on business, and the private equity firm’s portfolio is improved dramatically. The latter point is a lucrative on for such firms, who can maximise profits when it comes time to sell.
But the growing rate of acquisition has had a compensatory market impact, as a starker imbalance between investments and exits emerges. The exit market is ostensibly in decline – though this may not have the impacts that industry forecasters expect. The incoming market recession is another important factor to consider, that may see investors battening down the hatches in order to ‘go long’ and weather the downturn.