What is a Tuck-in Acquisition?
A tuck-in acquisition involves the acquisition of a smaller company and integrating it into the acquirer’s platform. The acquirer is usually a large company with a large infrastructure that the smaller company lacks. The smaller company usually have a strong owner but lacks the infrastructure and administrative resources to allow it to grow further, making it a potential candidate for absorption into a larger company’s platform.
The acquirer pursues the acquisition of smaller companies with the goal of increasing its revenues, market presence, and resources. Some examples of resources that acquirer is interested in include intellectual property, proprietary technology, and complementary product lines.
Tuck-in Acquisitions vs. Bolt-on Acquisitions
Both tuck-in acquisition and bolt-on acquisition occur when a larger company absorbs a smaller company during a merger and acquisition process with the goal of increasing its market share and product offerings. However, these two types of acquisitions differ in the way the acquired assets are treated.
This type of acquisition occurs when a large company acquires a smaller company in the same or related industry. For the acquirer to consider a small company for acquisition, it must have something unique that it is bringing on the table, which can be a new product, patent, expert manpower, technology or market share for a specific product.
After the acquisition, the smaller company does not retain its original structure, and it is absorbed into the departments of the larger company. The acquirer already has the technology structure, distribution systems, and inventory, and mainly pursues the target company with the goal of reinforcing its existing infrastructure.
In this type of acquisition, a large company acquires another smaller company in the same or related industry, but the smaller company remains intact and continues to function as a division in the large entity. It is especially common with small companies that have built a name in the industry and most people associate with its name.
The smaller company benefits by exploiting the acquirer’s infrastructure and economies of scale. On the other hand, the acquirer benefits from expanding its market share, product offerings, and customer reach.
Advantages of Tuck-in Acquisitions
The following are some of the benefits that the acquiring company gets after completing a tuck-in acquisition:
#1 New resources
A large company may consider completing a tuck-in acquisition as a way of obtaining new resources that it does not own. Such a company would target smaller companies with strong management and with the necessary resources that it requires. Acquiring new resources will help the acquirer increase its annual revenues.
Also, raising capital for future acquisitions will become easier, due to a broader pool of resources that can be used as collateral for bank loans. Acquiring resources that the company does not own will help the acquirer diversify its operations to other product and service lines that will produce additional revenues.
#2 Market dominance
Large companies also use tuck-in acquisition as a means to increase their market dominance. The practice is common in high-competition industries where several large companies compete for a share of existing customers. When a large company acquires and absorbs one of its smaller competitors in the company, it can increase its market presence, reduce the competitor’s market share, and diversify its product offering.
#3 Increased return on investments
When investors purchase the stocks of the company, they entertain high expectations of earning a high return on investment in the long run. However, in a market with intense competition, the company may experience slow or stagnant growth as each competitor tries to increase its market share. A large company can use tuck-in acquisitions to increase its market share and overall returns, which helps to achieve the shareholders’ expectations.
Disadvantages of Tuck-in Acquisitions
Despite their advantages, tuck-in acquisitions also come with a number of drawbacks:
#1 Costly to implement
Completing an acquisition is a costly affair, and the costs may exceed the earlier projections in some occasions. The acquisition cost may comprise asset acquisition costs, attorney fees, loan fees, regulatory fees, commissions, etc.
#2 Poorly matched partner
The acquisition may also end up as a failed acquisition where the two companies are incompatible or when the two companies rushed into completing the transactions without conducting due diligence.
Practical Example of Tuck-in Acquisition
Assume that Company ABC is a large company that offers digital payment solutions to customers in the United States, Canada, and Europe. On the other hand, Company XYZ is a small peer-to-peer digital payment company with operations in the United States. The company owns a proprietary technology that is unique in the industry.
Company ABC makes a proposition to acquire Company XYZ, and both companies agree to integrate their systems. XYZ’s systems are absorbed into ABC’s infrastructure, and the company rebrands to adopt ABC’s name. The acquisition allows ABC to increase its market dominance and acquire the proprietary technology used by Company XYZ.
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