The reasons companies make acquisitions vary widely and can be difficult to discern. Nonetheless, common patterns do emerge, and it’s possible to draw generalizations that assist in prioritizing your value drivers.
Why does that matter?
Knowing the reasons behind an acquisition will:
- Help you understand why executing certain value drivers may yield a higher potential return than other value drivers.
- Assist you in prioritizing your action plans.
- Help you develop the most suitable confidential marketing strategy for selling your company.
Companies make acquisitions because doing so spurs innovation, increases the odds of success, and reduces their chance of failure. But why is a company likely to acquire your business? What specifically may motivate them to want to purchase your business? How does a company decide between other corporate development programs, such as product development, and acquiring your business? Do most companies have similar acquisition strategies?
Wait. There’s more…
How does a company’s motivation for acquiring your business potential affect the value of your business? Is a company likely to see value in your technology, people, customer base, or products? How can you use this knowledge to increase the value of your business?
These are the questions. Now get ready for the answers. If you want to maximize the value of your business, read on to learn precisely why a company may want to acquire your business and what you can do to drive up the purchase price.
Table of Contents
- General Reasons Companies Make Acquisitions
- Spurs Innovation
- Increases the Odds of Success
- Reduces the Chance of Failure
- Specific Reasons a Company May Acquire a Particular Business
- Access to Technology
- Access to Markets
- Access to Customers
- Access to Talent (Acqui-Hire)
- Roll-Ups & Multiple Expansion
- The Diversity of Acquisition Strategies & Corporate Development
- Acquisition Strategies are Diverse
- Corporate Development Strategies are Diverse
- How Reasons for Acquisitions Relate to the Value of Your Business
General Reasons Companies Make Acquisitions
Small businesses are more innovative than big businesses. Most innovation occurs in small start-ups as they are more agile and willing to take greater risks than their larger counterparts. Larger companies acquire smaller companies because smaller companies are more innovative — most innovations are created in small companies and then brought into the mainstream by larger companies.
Examples include Uber and Lyft unseating much larger competitors in the $40 billion taxi industry, Airbnb making a significant dent in the $570 billion global hotel industry, or Netflix dominating the $100+ billion TV industry.
Increases the Odds of Success
Companies make acquisitions because it’s difficult, if not impossible, for companies to predict winners — whether they be product launches, partnerships, strategic alliances, or acquisitions. By completing a large number of acquisitions, a company can increase its odds of success.
To counter the low odds, competitors establish corporate investment funds to make either majority or minority stakes in a large number of upcoming start-ups. The majority of well-established tech companies have large, dedicated teams who are exclusively devoted to making acquisitions. Note — I said acquisitions, not an acquisition. Companies attempt to defy the odds by completing a series of acquisitions, as opposed to a single acquisition.
Reduces the Chance of Failure
In 2018, Jeff Bezos told his employees, “one day, Amazon will fail.” To think that the founder and CEO of a nearly $2 trillion company expects to fail highlights the dynamic changes that have taken place in business since the tech revolution began less than one generation ago.
Large companies have high failure rates. They have too many resources. Losses are huge when an innovation at a large company fails. By acquiring other companies, large businesses reduce their long-term chances of failure.
Specific Reasons a Company May Acquire a Particular Business
Access to Technology
The primary reason companies make acquisitions in the software, tech, or online space is access to technology.
But, it isn’t just access to technology — rather, it’s access to technology that has been validated by the market. Companies look to the ultimate decision-maker — the customer (i.e., customer validation) — to determine the potential success of a product.
With larger companies’ superior distribution networks, a large company can scale a solution out to the masses at a much faster clip than a small start-up with a limited marketing budget and sales team. By widening the acquirer’s product suite, the company provides a broader range of solutions to its customer base and will likely lower customer attrition and improve retention.
Access to Markets
Other companies acquire a business as a fast entryway into a different market segment.
For example, a software company in the restoration construction space could acquire a software company in the industrial construction sector. One of the objectives of the acquisition would be to gain quick access to the customer base and gain immediate reputation and credibility in the industrial sector. Such a move could allow it to roll out its existing suite of solutions to the customer base of the company it purchased in the industrial segment. Without the acquisition, the company may have a difficult time making the leap from one industry to another, so the acquisition shortcuts the leap and mitigates the risk associated with doing so.
Access to Customers
A major objective for some companies is access to strategic customers.
Perhaps a company has made countless futile attempts to gain access to blue-chip customers in their industry, and their attempts have been in vain. An acquisition would be a guaranteed method of gaining those customers if a competitor they purchase has existing relationships with those customers.
Access to Talent (Acqui-Hire)
While acqui-hires are less common in the lower middle market, they are common in the tech industry. With a shortage of talent in the tech sector in certain geographies, it’s sometimes fastest for a company to acquire a start-up that has a team in place, especially if the acquirer is entering a new market and their existing team has no knowledge of the new market they are entering.
Roll-Ups & Multiple Expansion
Finally, a large, well-capitalized competitor may go on an acquisition frenzy, acquiring multiple small competitors and rolling them up into one large entity with the goal of consolidation and expanding the multiple of their company. This plan of multiple expansion is important because the larger the EBITDA, the higher the multiple will be when the business is sold.
If the buyer is a financial buyer, they start by purchasing a platform company, which is typically a company generating a minimum of $20 million in annual revenue, and then complete a series of small, tuck-in acquisitions to round out the capabilities of the platform company by adding customers, technology, and other products to their line.
In roll-ups, consolidation is rapid, and premium pricing is temporary. If you don’t sell, you will be left to compete with the consolidated entity, which will have more resources — a larger sales force, stronger brand awareness, and premium pricing. Roll-ups are a great time to sell if this is occurring in your industry.
The Diversity of Acquisition Strategies & Corporate Development
Acquisition Strategies are Diverse
Even though the reasons for making an acquisition may be similar from company to company, acquisition strategies vary significantly from company to company.
Some companies, such as 3M, acquire hundreds of small companies at early stages, and therefore lower valuations. Other companies wait for significant customer validation before considering an acquisition and end up paying higher premiums.
Corporate Development Strategies are Diverse
Acquisitions are one of many corporate development strategies for companies. Well-funded companies establish strategic corporate development plans to supplement their strengths and mitigate their weaknesses. Corporate development plans include many strategies, such as:
- Internal research & development
- New product development
- Joint ventures
- Strategic alliances
- Mergers & acquisitions
- Divestitures and carve-outs to offload unprofitable business segments
In business, where there are no guarantees of success, a strategic corporate development plan is designed to maximize a company’s possibility of long-term success. M&A is one of many strategies in a company’s corporate development plan.
How Reasons for Acquisitions Relate to the Value of Your Business
There are a variety of reasons a company may seek to acquire you. Understanding the reason a company may acquire you helps maximize the energy you spend improving the value of your business.
While reasons for acquisitions vary, an M&A advisor can detect common patterns in your industry that will help you prioritize your value drivers, such as through our free and proprietary Return on Value Drivers Model (RVD™ Model).
M&A is only one weapon used within corporate development, but the aim of corporate development is universal — to maximize company value. By understanding your competitor’s strategy and objectives, you can take concrete steps to maximize the value of your company in their eyes.