Bolt-On vs. Diversification

by an investor from University of Illinois at Urbana-Champaign

2 years ago

Looking for pros/cons of making an acquisition within the same industry of an owned business vs. building a portfolio of unrelated businesses. Diversification into other industries seems beneficial at first pass, but trying to capture synergies by acquiring in the same industry is tempting. Does anyone have experience with bolt-on transactions? If so - Did you capture more or less synergies than expected? Were more synergies found on the revenue or the cost side?

Apologies for the buzzword-heavy post. I'm basically wondering if synergies are real or just sold by consultants.

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professional from University of California, Berkeley

I would think about this differently. You should NEVER diversify.... "just look at conglomerates in the 80s". Rather, you should look at business that can provide strategic synergies with one another.

Can you create an ecosystem of benefits with the other business? Can you vertically integrate? Are there benefits to this vertical integration? Will you gain more competitive advantage (from a porter's 5 forces perspective), if you acquired an adjacent business?

Roll up, which is what you mean by acquiring competitors can typically gain you cost synergies. It's hard to realize revenue opportunities when you buy more of the same thing.. unless scale can lead to pricing power against your customers or buying power from you vendors.

2 years ago | like reply | 0 likes

searcher from University of Pennsylvania - The Wharton School

I would think of this differently depending on your goals. If you are looking for the largest exit over a typical 5-10 year hold, I think a single vertical roll-up would be the way to go. It has clear precedence of working, would cater well to prospective strategic buyers, and is likely to result in multiple expansion as you scale up. If you are looking for a long term hold for personal investment, I think a diversified holding may make more sense. If I am looking at a###-###-#### year hold window, my biggest concern is weathering the major downturns of business cycles and would want non-correlated assets to provide the best protection.

2 years ago | like reply | 0 likes

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