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 that possesses the large infrastructure that the smaller company lacks. The smaller company usually has a strong owner but lacks the infrastructure, administrative resources, and/or access to capital required to facilitate growth. This makes 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 share, and resources. Some examples of resources that the acquirer may be interested in include intellectual property, proprietary technology, and complementary product lines.
Tuck-in Acquisitions vs. Bolt-on Acquisitions
Both tuck-in acquisitions and bolt-on acquisitions occur when a larger company absorbs a smaller company through a merger and acquisition process, with the goal of increasing its market share and revenues or expanding its product offerings. However, the 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 to the table. Among the things acquiring companies commonly look for are new products, patents, expert manpower, technology, and market share.
After the acquisition, the smaller company does not retain its original structure. It is often absorbed into an existing department 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.
With 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 of the large entity. This is especially common with small companies that have built a substantial brand in the industry.
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. Such a company would target smaller companies with strong management and the desired resources. 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, and that will produce additional revenues.
#2 Market dominance
Large companies also use tuck-in acquisitions as a means for increasing their market dominance. The practice is common in high-competition industries where several large companies compete for a share of the existing customers. When a large company acquires and absorbs one of its smaller competitors in the marketplace, 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 stock of the acquiring company, they entertain 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 earlier projections on 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 if the two companies are incompatible or when the two companies rush 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 processing 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, thanks largely to acquiring the proprietary technology used by Company XYZ.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful: