Private equity is very much about growth through acquisition. Acquisitions give the private equiteer the ability to create instant value through multiple arbitrage, synergistic cost savings and synergistic revenue increases. While synergies can take time to realise (some may be instant), it’s the multiple arbitrage that can really boost value quickly.

The Reality

Here’s what actually happens in practice, beyond the theory.

Because of this phenomenon, private equiteers are highly motivated to make high-value bolt on acquisitions for their primary investments. However, it is important that these bolt on acquisitions are highly strategic in nature, otherwise long-term value may be negatively affected. Acquisitions should create real synergistic value, they should align with the core objectives of the group, and generally, they shouldn’t just be based on multiple arbitrage.

The reason for this is manifold. Prospective buyers of the overall group will only apply market multiples to businesses that make sense. If I’m trying to sell a furniture retailer at a market multiple of 10x, most strategic buyers won’t also pay 10x for a small green grocer that I’veboltedon.

Additionally, even if I bought the green grocer for only 3x, there is an administrative overhead with running another business as a bolt on acquisition. With another furniture retailer as a bolt-on acquisition, this overhead may be relatively minor since the skills already exist to run the business and most of the back office integrates anyway. However, with a green grocer, we don’t have the skills, there’s virtually no integration and we now essentially have an investment in a completely new market.

Out of all this, I don’t think the term bolt-on acquisition is pejorative enough to describe many of the acquisitions that are occurring. Maybe more fitting is the term clip-on acquisition, stick-on acquisition or (more originally) completely-unrelated acquisition.