What is an LBO add-on acquisition? Well, it starts with a basic LBO acquisition of a company. Nothing special, but then involves adding on another company later on, so the two are merged. This can sometimes be called a bolt-on, and the strategy can be referred to as buy and build.

But why would an acquirer choose to do this? I.e. Why do an LBO and then add on another company later on? Well, there are a number of reasons. It can be to create more value by growing the portfolio, cutting costs through synergies or economies of scale that we'll get by owning two or more companies, better technical ability, maybe the add-on brings special IT capabilities.

And lastly, expansion into new geographies.

Add-ons also allow for quick growth of the acquirer who may be growing organically, but very slowly.

There are some common characteristics we see in add-on companies. One of these is that the add-on company often has a lower valuation multiple compared to the acquirer.

But as soon as the add-on is acquired, its cash flows may suddenly be valued using the higher acquirer multiple before any synergies occur. So the acquiring company effectively pulls the add-on up to its own level.

The company's targeted as add-ons may also be underperforming, either due to lack of resources or lack of management, meaning the acquirer can buy it and then quickly turn it around.