Analogies between Tuck-in M&A and portfolio investing returns

In portfolio investing like venture capital or private equity, you are balancing risk versus reward to obtain a portfolio or fund return.   Some deals may be a home run and some may be a single or worse a zero.   Similarly in M&A you are balancing risk versus reward.  Customer or book acquisition where you acquire only the customers that transition to your platform is low risk and accretive but not huge rewards from one transaction.  A tuck-in acquisition that dramatically improves your product or provides a best of breed adjacent solution to cross-sell maybe be higher risk but offers much higher reward.

Auren Hoffman wrote a thought-provoking post called M&A is a Power Law.  He provides great commentary of grand slam home run acquisitions like Google buying YouTube, Facebook buying Instagram and Priceline buying Booking.com.   These are legendary acquisitions and the best of serial acquirers like Google, Facebook, and Priceline.  For example, according to CB insights Google has done more than 200 announced acquisitions since 2001 and some other pretty monster ones like Android, Doubleclick, Admob, and Waze.  Wikipedia lists 83 acquisitions by Facebook and 14 acquisitions for Booking Holdings (the new parent of Priceline).

Comparing Hoffman's observations to my experience, I have seen similar outsized returns (albeit on a much smaller basis) compared to projections from tuck-ins where we have done multiple deals at a platform company.  In one situation, one of six acquisitions dramatically expanded our TAM and provided deep domain expertise to allow the platform company to take a much bigger position in the competitive space.  In another case, one of the four acquisitions made us a multi-module solution and drove material incremental revenue and therefore our growth rate.  Lastly, in a BPO company that did four acquisitions, two of them dramatically improved the technology behind critical offerings and provided real differentiation when we went to sell. 

Clearly, you need to focus on tuck-in acquisitions in or adjacent to your market focus but like venture capital deals some tuck-ins can dramatically create value and more than make up for acquisitions that are marginal or modest returns.  Note, large acquisitions or acquisitions of equals are much trickier and aren't a portfolio.  If you get it wrong or just time it wrong, it will negatively dominate the outcome for the company.

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