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How Do Business Model Differences Impact Your M&A Operating Model Framework
Mergers and acquisitions are immensely complex and fairly risky ventures; will they be successful? Well, that depends on different variables. For instance, technology, such as virtual data rooms, has made it easier to complete an M&A transaction smoothly and quickly. The best data rooms on the market offer ready-made due diligence checklists and bank-grade security, therefore making an M&A a less overwhelming process. This way, the involvement of technology is a major variable that plays an important role in M&A transactions.
However, there are some strategic elements that can make or break a merger or acquisition. Closing an M&A deal is one thing, but integrating two business entities in every aspect is another thing. An online data room software can help in closing the deal faster and may provide future insights. But, the business models of both companies also play an integral role in post-merger success.
Generally, there are two types of acquisitions from the strategic point of view:
- Tuck-in acquisitions
- Bolt-on acquisitions
Today, we are going to discuss these strategies, their pros and cons, and then you can decide which acquisition strategy will work better for your business.
The term tuck-in is clearly describing that in tuck-in acquisitions, one business entity (smaller in size) is tucked-in to a bigger company. In other words, you can say that one large business organization will absorb the other company completely, and the acquired company will have no separate identity in the future.
Generally, tuck-in acquisitions are pretty straightforward. Yes, there is a massive difference between the sizes of the seller and the acquirer, but they share relatively similar business models and are generally from the same or relevant industries. This allows the acquirer to assimilate or absorb the smaller company easily. Moreover, the tuck-in acquisitions are often low-risk ventures because the acquired companies are smaller in size.
Tuck-in acquisitions can be very effective for larger organizations in many ways; here are some of the pros of tuck-in acquisitions.
- Increased/enhanced presence in the market
- Diversification in the acquirer’s portfolio, products, or services
- A decrease in your competitor’s market share
- Competitive advantage for the acquirer
- Help in increasing returns
- Ease in raising more capital as the acquiring company has more assets to use as collateral/security for loans
Tuck-in acquisitions may look like the go-to option, but here is something you should consider before jumping to a decision.
- The first biggest disadvantage of tuck-in acquisitions is that they can be high-cost. The acquirer will have to cover different types of costs such as asset acquisition costs, commissions, regulatory fees, loan fees, attorney fees, and the list can be very long.
- A mistake or negligence during the due diligence process can be very costly for the acquirer; the overall costs of the project may increase significantly. However, this risk can be reduced by opting for a secure data room service. As mentioned earlier, a virtual data room can minimize the room for errors during the due diligence stage.
- If the acquirer doesn’t get enough or all necessary data during the due diligence process, it is highly possible that the infrastructure, culture, and technology of both organizations may be incompatible for integration.
In bolt-on acquisitions, the acquirer doesn’t absorb the acquired company. Instead, the acquired organization is bolted-on to the acquirer. In other words, the seller/acquired firm acts as the subsidiary of the acquirer.
Moreover, in bolt-on acquisitions, the company acquired by the buyer retains its separate identity and branding. These types of acquisitions are common when an organization wants to:
- Increase or expand its portfolio
- Increase/boost its cash flow generation
- Expand its operations into a new market or region; buying an already established firm in a specific area/market can help the acquirer achieve its expansion objectives.
- Bolt-on acquisitions are a great way to expand your portfolio. This is very helpful for private equity firms because they often go for bolt-on acquisitions before selling. New customers, geographies, product line, etc., play a vital role in increasing a company’s value.
- These acquisitions help a company grow faster, especially if there are multiple acquisitions.
- Bolt-on acquisitions are easier and smoother in terms of integration. That is because both firms don’t have to integrate all their systems. This gives more autonomy to the acquired company and thus reduces the chances of infrastructural, cultural, and technological conflicts.
- Cultural and talent conflicts can still arise in bolt-on acquisitions, especially if you don’t have a plan of action for post-merger integration. Therefore, make sure your post-merger agendas are as important as pre-deal objectives. It is not difficult to understand that failing to determine what should and shouldn’t be integrated can lead to inter-organizational conflicts.
- Too many bolt-on acquisitions may backfire as well. It can lead to over-diversification, loss of efficiency, loss of focus, less transparency, etc.
From all the discussion above, it can be easily concluded that due diligence is vital for any merger and acquisition. This is the stage where you can identify whether the seller can be easily integrated into your business model or not. An electronic data room can be very helpful to make things easier and transparent during due diligence.