Why do Companies Acquire other Businesses?
The motivations that drive companies to pursue acquisitions are diverse and often intricate. Nevertheless, recognizable trends emerge, enabling us to formulate overarching insights that prove valuable in prioritizing your value drivers.
Why is this significant?
Understanding the rationale behind an acquisition will:
- Empower you to discern which value drivers can potentially yield a higher return than others.
- Guide you in orchestrating your action plans with a strategic focus.
- Facilitate the crafting of a confidential marketing strategy tailored to optimize the sale of your company.
Companies engage in acquisitions as a catalyst for innovation, a means to enhance success prospects, and a safeguard against failure. Yet, what prompts a company to consider acquiring your enterprise? What specific factors might motivate them to pursue this course of action? How do they navigate the choice between various corporate development avenues, such as in-house product development versus business acquisition? Are there common acquisition strategies across most companies?
But wait, there’s more…
How does a company’s motivation for acquiring your business intersect with its potential perception of value? Could they find value in your technology, workforce, customer base, or product portfolio? How can you leverage this insight to elevate the value of your business?
These are the questions at hand. Prepare for the answers. If you’re intent on maximizing your business’s value, read on to grasp precisely why a company could be interested in acquiring your enterprise and how you can strategically boost the acquisition price.
General Reasons Companies Make Acquisitions
Small businesses serve as hotbeds of innovation, often outshining their larger counterparts. The heart of innovation beats within agile startups, fueled by their willingness to embrace greater risks. These traits compel larger enterprises to seek out acquisitions of smaller counterparts, capitalizing on the innovation that springs forth from these nimble players.
Noteworthy examples include Uber and Lyft, who revolutionized the $40 billion taxi industry, Airbnb’s transformative impact on the $570 billion global hotel sector, and Netflix’s resounding dominance in the $100+ billion TV realm.
Enhances Success Prospects
Acquisitions serve as strategic moves driven by the recognition that predicting winners—whether in product launches, partnerships, alliances, or acquisitions—is a formidable challenge. A company’s acquisition spree is a strategic approach to stacking the odds in its favor.
To counter the odds, competitors establish dedicated corporate investment funds, backing a multitude of emerging startups through majority or minority stakes. Established tech giants boast robust teams exclusively dedicated to executing acquisitions, aiming not for a singular acquisition, but a series of strategic acquisitions to defy the odds.
Mitigates Risks of Failure
In 2018, Jeff Bezos candidly told his employees, “one day, Amazon will fail.” This assertion from the founder and CEO of a nearly $2 trillion company underscores the seismic shifts that have reshaped the business landscape since the tech revolution’s inception, a mere generation ago.
Large corporations grapple with pronounced failure rates, a side effect of their abundant resources. Failures within these behemoths come at a steep cost. By acquiring diverse companies, these giants strategically hedge against long-term failure risks, adapting to the ever-evolving dynamics of modern business.
Specific Reasons a Company May Acquire a Particular Business
Access to Technology
At the forefront of software, tech, and the online realm, the paramount impetus behind corporate acquisitions is attaining technology prowess.
However, it’s not solely about gaining access to technology; rather, it’s about securing technology validated by the discerning market. Companies turn to the ultimate arbiter of decisions—the customer (in other words, customer validation)—to gauge the potential triumph of a product.
Leveraging the expansive distribution networks of larger enterprises, these industry giants can swiftly proliferate solutions to the masses, outpacing small startups constrained by limited marketing resources and sales teams. Bolstered by an expanded product suite, the acquiring company bestows a comprehensive array of solutions to its customer cohort, thereby likely curbing attrition rates and elevating customer retention.
Access to Markets
In the realm of corporate strategy, certain entities opt to acquire businesses as a swift avenue to penetrate a distinct market segment.
Consider a scenario where a software company specializing in restoration construction ventures to acquire a counterpart in the industrial construction domain. Through this strategic move, one of the pivotal aims would be rapid access to the new customer base, accompanied by an instantaneous elevation of reputation and credibility within the industrial sector. This astute maneuver enables the software firm to seamlessly extend its existing suite of solutions to the acquired company’s industrial clientele. In the absence of such an acquisition, transitioning between industries could prove daunting, making the acquisition a pragmatic shortcut that effectively curbs associated risks.
Access to Customers
For certain enterprises, a pivotal goal revolves around securing access to strategic customers.
Consider the scenario where a company has persistently strived to establish connections with industry-leading clients, only to encounter repeated setbacks. Despite their best efforts, success has remained elusive. In such a context, an acquisition emerges as a resolute strategy to attain those coveted customers. By acquiring a competitor that already holds established relationships with these clients, the company ensures a definitive pathway to gaining the clientele they’ve been pursuing.
Access to Talent (Acqui-Hire)
Although less frequent within the lower middle market, acqui-hires are a prevailing practice within the tech industry. In regions where the tech sector grapples with talent shortages, the acquisition of a start-up with an established team can often be the swiftest approach. This is particularly applicable when a company is venturing into a novel market and lacks expertise in that domain within its existing team.
Roll-Ups & Multiple Expansion
In a strategic move, a well-capitalized and sizeable competitor might embark on an acquisition spree, assimilating numerous smaller rivals and amalgamating them into a singular, expansive entity. This consolidation endeavor aims to magnify their company’s multiple, a pivotal factor in maximizing the valuation during a potential sale.
For financial buyers, the approach begins with acquiring a platform company, typically one generating a minimum of $20 million in annual revenue. Subsequently, a series of smaller tuck-in acquisitions are executed to augment the platform company’s capabilities. This involves integrating additional customers, technology, and products into their portfolio.
In the realm of roll-ups, consolidation occurs swiftly, and premium pricing is transient. Opting not to sell leaves you in competition with the consolidated entity, which wields greater resources: a larger sales force, heightened brand recognition, and premium pricing. If such roll-ups are reshaping your industry, it’s an opportune moment to consider selling.
The Diversity of Acquisition Strategies & Corporate Development
Acquisition Strategies are Diverse
While the motivations behind acquisitions might share similarities across companies, the strategies employed for acquisitions exhibit considerable diversity among different firms.
For instance, companies like 3M adopt a proactive approach by acquiring numerous small ventures at their initial stages, often at lower valuations. In contrast, some companies opt to await substantial customer validation before pursuing an acquisition, resulting in the payment of higher premiums.
Corporate Development Strategies are Diverse
Acquisitions stand as a vital component among various corporate development strategies employed by companies. Well-capitalized firms establish comprehensive corporate development plans aimed at leveraging strengths and addressing weaknesses. These plans encompass diverse strategies, including:
- Internal research & development
- New product development
- Joint ventures
- Strategic alliances
- Mergers & acquisitions
- Divestitures and carve-outs to divest unprofitable business segments
In the dynamic realm of business, where success is never guaranteed, a well-crafted corporate development plan is meticulously designed to enhance a company’s chances of achieving sustainable long-term success. Amid these strategies, mergers and acquisitions play a pivotal role within a company’s corporate development agenda.
How Reasons for Acquisitions Relate to the Value of Your Business
Companies embark on acquisitions for a multitude of motivations. Grasping why a company might consider acquiring yours empowers you to channel your efforts effectively in enhancing your business’s value.
While the impetuses behind acquisitions are diverse, an M&A advisor can discern recurrent trends within your industry. This insight equips you to prioritize your value drivers, facilitated by our proprietary and complimentary Return on Value Drivers Model (RVD™ Model).
M&A stands as a singular facet within the realm of corporate development. However, the overarching goal of corporate development remains consistent: to optimize company value. By comprehending your competitors’ strategies and objectives, you can strategically bolster your company’s value proposition in their perspective.