Preparing for an M&A Bolt-On: A Comprehensive Guide

This year, Grammarly, a company known for its helpful writing assistant, is looking to expand its offerings beyond just writing tools. In December, the company announced its acquisition of Coda, a smaller startup valued at $1.4 billion in comparison to Grammarly’s $13 billion. The idea behind this move is to integrate Coda’s collaboration and productivity tools into Grammarly’s platform to provide even better products for Grammarly users.

This type of acquisition is known as a ‘bolt-on acquisition,’ where a larger company acquires a smaller competitor to fuel its own growth. Many startups use this strategy to expand and improve their offerings. For example, Italian unicorn Bending Spoons has recently acquired several companies, including WeTransfer, Hopin, and Meetup. Another example is the micromobility company Bolt, which has also been utilizing the M&A strategy.

According to Alexandra Wyatt, a vice president at J.P. Morgan’s Innovation Economy team, startups and scaleups are constantly looking for ways to grow, and acquisitions can be a key strategy in achieving that. But how can startups effectively use bolt-on acquisitions to boost their growth? We turned to the experts at J.P. Morgan for some insights.

1. **What are the benefits of a bolt-on acquisition?**

Acquiring another company can help expand a startup’s customer base, reach new markets, or enhance capabilities. However, it’s crucial to be clear about your goals before seeking out potential targets. According to Wyatt, the success of an acquisition hinges on how well it aligns with the startup’s objectives. It’s essential to define what success means upfront and to evaluate how the acquisition contributes to the startup’s goals and overall value creation.

2. **Finding — and analyzing — your targets**

Once you have a clear understanding of your goals, it’s time to analyze the market and identify potential targets. This involves networking, conducting market research, and seeking advice from specialists like consultants, banks, and lawyers. It’s also essential to analyze the target’s unit economics, financials, and key metrics specific to the industry they operate in. For example, internet companies may focus on metrics like active users and customer acquisition costs, while software companies may look at metrics such as Annual Recurring Revenue and Net Revenue Retention.

3. **Understand the risks**

While acquisitions can offer significant rewards, they also come with risks such as overpaying, cultural clashes, and integration challenges. It’s important to have a detailed integration plan in place before making an offer and to consider the cultural fit between the acquiring company and the target. Professional advisors can help conduct thorough due diligence and identify any potential red flags during the process.

4. **Think about the financing and value creation**

Successfully executing a bolt-on acquisition can lead to operational savings and revenue growth by combining resources and cross-selling products. Pieter Himpe, a managing director at J.P. Morgan, emphasizes the importance of growth and profitability as value drivers in determining pricing for an acquisition. Cash, debt, or equity are common ways to finance an acquisition, and having a clear plan for creating value post-acquisition is crucial.

In conclusion, bolt-on acquisitions can be a powerful strategy for startups looking to accelerate their growth and expand their capabilities. By carefully defining goals, analyzing targets, managing risks, and focusing on value creation, startups can effectively leverage acquisitions to drive success in a competitive market.