Tuck-In Acquisitions Take Work to Succeed

“Tuck-in” acquisitions occur when a larger company acquires a smaller one with similar products and services and folds that business into its existing operations. Although popular, these transactions don’t always run as smoothly as their name might imply. That’s why buyers and sellers need to work together to ensure that the company is integrated fully and quickly following closing.

Strategic impetus

Buyers in particular tend to regard tuck-in deals as being a simpler proposition than a merger of relative equals. Sellers may have a smaller operational scope or may be at an earlier stage of development, but they usually share other characteristics with their buyer. The strategic reasons for acquiring such targets are generally straightforward: to enhance the buyer’s business model.

Here’s a common scenario: A software manufacturer offering a line of enterprise solutions wants to expand its portfolio of offerings and its market reach. Instead of trying to develop niche software requiring specialist expertise and considerable resources in-house, it makes a series of tuck-in acquisitions of small software developers. Upon acquisition of these businesses, the buyer is ready to sell the new products.

How, what and who

Although such acquisitions seem like they could be easier to integrate, there are likely to be plenty of postclosing challenges. Before committing to buying a particular company, buyers should ask the following questions:

How quickly can the seller’s product lines be adapted by your company? Will you need to redesign products before putting them on the market with your own name? If the product is software, is it technologically compatible with your existing portfolio? Any incompatibility adds time and money to the equation.

What factors have gone into the product’s success in the past? If location or a business owner’s relationships have fueled sales in the past, you may have trouble duplicating the results unless you bring new value propositions to the table.

Who will be responsible for the new unit? If you plan to hand over control of the acquired business to your managers, how well will they work with the seller’s employees during integration and afterward?

Will the integration process be too disruptive to the future of the product? Think about your deal from the perspective of a customer who might worry that sales and delivery transactions will be less convenient or that prices will rise. Anytime a customer sees the “joins” of a tuck-in deal, it’s a potential danger point.

Say, for example, that an acquired unit’s customers and vendors will now have to work with your accounting department. You need to ensure that they won’t experience greater delays or more bureaucracy than they have under previous ownership. Otherwise, they may start looking for a more reliable vendor or less troublesome customers.

Team challenges

Consider the human factor, too. It’s easy in theory to tuck in a smaller company’s team and then resume business as usual. In reality, moving people into a new environment with a different culture can cause friction and discontent. For instance, new employees may resent having to adapt to a more structured work culture or greater staff/management barriers.

To head off such challenges, research your target’s business culture during the due diligence process. How are the seller’s products or services designed and implemented? Who makes the decisions? Are there existing conflicts between workers and managers that might carry over after the acquisition?

Protect the deal’s value

Once your transaction has closed and you begin integration, any possible deal flaws will become apparent. So take advantage of the negotiation stage and work through issues with the other party. The harder you look for potential problems, the better chance you have of containing them before they diminish the value of your tuck-in deal.

© 2017