How and Why do Companies Acquire Companies?
For people who love Instagram, they may or may not have noticed a very subtle change recently. Anytime you now open the app, before anything loads, you’ll get a screen that says, “Instagram by Facebook”.
For a few years, it was widely known that Facebook owns the photo app, but this recent change is the first time the company has said: “Yeah, we own that”. It’s quite an unusual thing to do, as most companies which are in the market of acquiring other properties never make a song and dance about it (unless you’re Disney).
When you’re in the supermarket, you’ll never lift a packet of Uncle Ben’s rice or Dolmio pasta sauce and have it say “made by Mars” on it. So why do companies go out of their way to acquire other companies? Is it all to do with money? Are big companies freaked out by competition? Or do they see value in smaller companies they think the world should know about?
It’s a rare combination of these, and a little more, and in this short post we’re going to find out why.
Companies know value
Let’s start with the logical reason why companies acquire companies. In most cases, they see value in a shiny new thing and want it. Many corporations will want to buy a business not because it’s another thing to claim but because they see value and want to nurture it.
Take Disney, for example. They’ve been on an acquisition rampage in recent years buying up the likes of Marvel, Star Wars and Fox Movies. They’re not buying them because they want to create a monopoly (fun fact: Lionsgate own the rights for a Monopoly movie) but because they see that these companies can provide long term value; value that can come in the form of new theme park rides and merchandise.
If you realise there’s more new value to Baby Yoda than another Mickey Mouse toy, you get bigger.
Companies want to get bigger
Imagine if you could go to the gym, get bigger & stronger, and not lift a single weight. It’s sort of how companies grow over time. Acquisitions provide companies with the chance to make gains without putting in the hard work and using advisors (more on that below).
Companies use Buy-Side Advisory
Big companies hate the idea of taking risks. When you run a small start-up, any small gamble has next to no risk. Have a company with hundreds of employees though, and even the simplest of decisions need to be run by committee and experts to go ahead.
Most companies, especially corporations, will use buy-side advisory to acquire other companies. Advisors help act as the middle man between two companies as a means to help everyone get what they want, ensure that an acquisition matches the value expected and (most importantly) keep the acquisition process above board by crossing every T and dotting every I.
Companies wait to reach the wider market
Sometimes a business can, for lack of a better analogy, be a big fish in a small pond. For example, if a start-up has developed a product that they know an entire industry would benefit from, but cannot get it out there, they’re stumped. It is quite common for small pharmaceuticals who develop new medicine or software for hospitals to create a fully-fledged product that is ready to go and then park it on the shelf while trying to get more prominent pharmaceuticals to absorb their company.
Companies get someone else to do it
Whatever your views are on whether we’re living in a “gig economy”, there’s a truth to power in letting someone else do the job you can’t if they do it better and then paying them for it. The best example of this is something about 50% of phone users have with them at all times: Siri.
When Apple was first developing the assistant, they didn’t have the capabilities to build parts of the platform themselves. So what did they do? Well, they went to the SRI International Artificial Intelligence Center and put a price on their amazing assistant software, before then going to Nuance Communications and buying their speech recognition engine. As Siri developed over time, Apple went and grabbed bits and bobs here and there to integrate it. They even did it with Beats by Dre, after it launched a streaming service to beat Spotify and Apple realised it didn’t need iTunes anymore.
As long as someone else is doing it better than you ever will, there’s value.
Lastly, and arguably the silliest reason why companies will acquire each other is simply down to panicking. If you have a company and find that a competitor is doing something new that could threaten your business, you’ll want to beat them to it.
This happens all the time in the tech sphere, and one of the best examples was in Silicon Valley in the 90s. A company called Netscape, who made internet browsers before anyone else, had an eccentric owner called Jim Clark. Clark thought the internet (rightly) was the future, but people would want it directly through their TVs. He created the interactive television, which TV companies in America all wanted to invest in.
The hubbub caused panic and other tech companies in Silicon Valley also wanted their version of an interactive TV. Billions of dollars were spent as companies panicked and wanted to get there first, but in the end, not a single interactive TV was put to market and sold. The product didn’t work (it was the 90s after all) but it shows that companies can blindly throw money at projects to outdo one another and avoid being acquired down the line.
By avoiding the panic and feeling like you have to act, you can acquire value in the long term.
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