Add-on acquisitions are booming in 2020, accounting for 63.4% of deal volume in Europe this year, and 71.4% of middle-market deal value in the US during Q1. In this article, we’ll take you through what add-ons are, why they’re booming, and what you can do to understand and discover more about the trend.
What is An Add-On Acquisition?
An add-on acquisition is when a private equity firm or other buyer acquires a company and integrates it into an existing company within the buyer’s portfolio. Add-ons are generally strategically positioned and sought out to add value to the portfolio or use them to stimulate growth inorganically within a portfolio company. Add-ons can also be a way of bumping up company value before a sale. Often this can be called a “buy and build” strategy, where the PE firm attempts to raise the value of a company by forcing its growth, rather than letting it occur naturally.
Why PE Firms Pursue Add-On Acquisitions
Many PE firms use add-on acquisitions to stimulate the development of a company that they have interest in growing and increasing the value of, with the goal of taking it public or selling it for a greater return on their investment. There are a number of benefits to add-on acquisitions, the main ones including:
- Lowering costs by merging staff members with similar expertise
Merging staff members with similar expertise creates opportunity for synergies to arise, and lowering costs is always beneficial for valuations.
- Expansion into new regions, domestically or abroad
Expansion into new regions means expanding opportunities for building new relationships, finding new customers, hiring new talent, and potential profit.
- More product offerings
More product offerings attract new customers, increase potential profits, expand growth potential, and enhance equity and assets to attract prospective investors.
- Cross-selling opportunities
Cross-selling opportunities are opportunities to leverage the current customer base of both entities for increased growth potential and profits.
- Consolidation of management
Consolidation of management synergizes the experience, knowledge, and relationships, to create more possibilities, as well as reduce costs.
- Consolidation of finances
Consolidation of finances increases buying power and the value of equities and assets to attract possible investors.
- Boosting buying power
Boosting buying power increases investment possibilities, growth potential, and investor interests.
Add-ons have been booming in 2020 for a number of reasons, and it will take time and further analysis to fully see why. COVID-19 is likely a cause, which has affected company valuation across the board in numerous industries. 2020 has also seen an enormous increase in dry powder in the market, likely accounting for many PE firms deciding to opt for add-ons as they potentially waited for valuations to soften.
How to Research Add-On Acquisitions
According to Law 360:
“In the first quarter of this year, during which period the pandemic had already begun to chill investment, add-on acquisitions constituted 71.4% of middle-market deal value, as compared to just 55.4% of middle-market deal value in the first quarter of 2019.”
Add-on acquisitions are hot right now, given the chill market, and now is a great time to begin research. Basically, it comes down to getting a good sense of your target and how they might affect a portfolio company in the event of an add-on acquisition.
Some key topics to research when looking at your target and speaking with its management team include:
- The state of sales distribution
- Potential management gaps
- IT issues
- Poor accounting
- HR and employee benefit structures
- Costs of merger
Strategies for Finding High-Value Add-On Acquisitions
Obviously as 2020 and 2021 continue to perpetuate a possibly erratic valuation backdrop, finding high-value targets will continue to be important. Below 5 key strategies to consider.
- Assess the Size of Target Market
Understanding a market size helps you make good quick decisions on what kinds of firms to look at for your current portfolio. Our platform gives you the tools to do effective TAM and market intelligence. Likewise you can utilize platforms such as ours to quickly find multiple related private companies in a specific industry, and then gauge their size and value through a variety of searchable metrics.m
- Utilize Big Data in Order to Understand Markets
Leverage your strategic expertise with actionable market mapping, rather than spending time researching. Luckily the digital footprints of modern companies can be quite large, it’s important to think about how New School Deal Sourcing strategies can help you locate more opportunities.
- Go Beyond the Annual Report
A variety of companies allow you to peer behind the scenes at a company without being stuck with the same info everyone else is using. Our platform can give you insider access to company operations information, all of which can help you quickly locate vertical specific add-on targets that could be useful for your portfolio.
- 10X Current Contacts
- Networking Prep
Similar to turbocharging your current network, don’t fly into conferences blind. SourceScrub offers a variety of tools that allow you to find good leads before you hit the virtual “conference floor.” Mingling has fundamentally changed in the post COVID era, but that almost makes it easier to quickly research contacts on the fly.
Add-Ons That Add Value
Similarly to larger mergers and acquisitions, add-on acquisitions are advantageous for both buyers and sellers in a number of ways. It’s an efficient means for PE firms to add value to a portfolio with considerably less risk than larger acquisitions. For a successful add-on acquisition to take place, it’s important that both companies are able to align and strategically integrate their synergies.
Determining which prospective add-on acquisitions have the most potential for success is a matter of in-depth research and evaluation. PE firms and investment banks use tools like SourceScrub’s deal sourcing and M&A platform to identify potential add-on acquisitions, and more. Request a SourceScrub demo today and find out if an add-on acquisition is the right fit.