Build or buy: these are the two main frameworks for companies to achieve growth. Some companies opt to achieve growth organically (building), while others find it more efficient to buy growth, acquiring strategic or complementary companies — commonly referred to as add-ons.
Here are three ways add-on acquisitions can boost ROI.
Add-ons can lead to higher valuations and
Since these benefits are market-driven and not operational, the company can’t realize them until it raises capital or sells itself. Multiple expansion precipitates higher valuation which affects cheaper costs of debt and equity capital.
Add-ons can create cost synergies.
For example, a large freight company with excess warehouse capacity and truck space can buy a smaller competitor, discard its assets, and assume its inventory and trade routes for minimal incremental cost.
Add-ons enable cross-merchandising.
Penetrating deeper and wider customer channels inevitably leads to revenue gains. Revenue synergies occur when the merged entity consolidates the customer bases of the prior standalone companies and either sells complementary products to the same customer, or the same product to new customers.