M&A Bolt-on - the ‘buy and build’ strategy

Bolt-on, the process of acquiring a smaller company, is one of the popular strategies used by large corporations, private equity investors and venture capital funds. In 2023, as many as 76.1% of buyout transactions in North America were bolt-on deals. This may indicate a strong preference for this strategy due to the debt financing challenges of larger acquisitions.

Currently, the bolt-on market is dominant in North America and Europe. US PE firms, faced with the challenges of debt financing large acquisitions, are increasingly opting for bolt-on acquisitions as a more accessible and less financially risky solution. Europe, where bolt-on accounts for around 40% of acquisitions, is also developing a strong presence in this sphere, albeit with a slightly different dynamic due to the fragmented nature of the European market.

In the following article, I will attempt to provide an overview of the bolt-on process, its benefits and detail the role played by the Virtual Data Room (VDR) in the successful implementation of this strategy.

Bolt-on is an acquisition strategy that aims to add a smaller, often specialised, company to a larger, already well-developed entity. It is a process that seeks to complement the core business of a company in order to primarily increase the scale of operations, geographic reach or introduce new products or services. A key objective of a bolt-on is to strategically strengthen an existing offering or market position without full integration. For example, acquisitions of smaller technology companies allow the company to close the technology gap, streamline logistics and benefit from economies of scale. Unlike full-scale mergers, bolt-on acquisitions allow for a smoother and faster integration of new entities, and this in turn minimises operational disruption.

01. Analysis and selection of a suitable target – in other words, identifying a smaller company that will best complement the larger entity’s operations.

02. Negotiation and evaluation process – defining the terms of the deal, including purchase price, payment terms and details of future integration. It is also important to secure management agreements, retention of key talent and protection of intellectual property.

03. Due diligence – This is one of the most key elements of the bolt-on process, identifying the potential risks and benefits of the acquisition. You can read about how important this process is and what it involves in the article ‘Company Due Diligence – what is it and how does the process work?’

04. Finalisation of the deal – At this stage, the parties sign documents that formalise the acquisition and the transfer of assets or funds is completed.

05. Integration – Unlike standard mergers, where full integration may be necessary, in a bolt-on, the aim is often to leave more autonomy to the smaller company. This allows it to maintain its organisational culture, flexibility and innovation.

• Faster growth – The acquisition of a specialised company allows you to increase the scale of your business, gain new markets, introduce innovative products or gain a technological advantage.
• Economies of scale – The addition of a new entity can allow for greater operational efficiencies through increased scale. For example, a new company may introduce technologies or processes that reduce production or distribution costs.
• Diversification – With a bolt-on, a company can diversify its offering, which in turn reduces the risk associated with dependence on one product or market. Acquiring a smaller company with a different but complementary business can expand the product portfolio and provide greater financial stability.
• Optimising the use of resources – The acquisition of smaller companies often involves gaining access to new resources such as talent, technology, patents or customer networks.

Virtual Data Room (VDR) providers, a sophisticated system that enables the secure management and sharing of sensitive documentation, play a key role in the implementation of bolt-on processes. Given the scale and dynamics of bolt-on transactions, VDR providers offer highly scalable solutions to handle multiple transactions simultaneously. With their support, these processes run more smoothly, ensuring not only data protection, but also efficiency in communication between the parties involved.

• Data security – Bolt-on acquisitions require meticulous due diligence to assess the fit between the smaller target company and the larger organisation. VDR systems streamline the secure exchange of confidential documents, making them essential for M&A teams. Explore the details in the article ‘Why a VDR in the Due Diligence Process?’.
• Ease of access – With a VDR, all parties involved in the process, have easy access to documentation anywhere, anytime.
• Activity tracking – The use of a VDR allows the monitoring of user activity in the system, informing the involvement of individual parties in the process.
• Elimination of errors – The VDR minimises the risk of documents being shared with the wrong people.
• Automation of the due diligence process – The use of advanced AI modules reduces the time required for the due diligence stage itself.

Bolt-on is an extremely effective growth strategy for larger companies and private equity funds. It enables faster growth, greater diversification and better utilisation of resources, while reducing the risk of full integration. However, a key element of bolt-on success is thorough due diligence and effective information management, making the Virtual Data Room (VDR) an essential tool in the process.

The need for secure access to data, optimal organisation and monitoring of activities make the VDR significantly accelerate decision-making, minimise risk and ensure information security, making it a key component of successful bolt-on transactions.