Company acquisitions are not only helping to fuel the growth of many burgeoning and rapidly-evolving industries, they are helping to diversify the choice of products and services to valued consumers. Some of the world’s largest companies acquire innovative and ambitious companies every year. Contrary to popular belief, acquisitions of companies by other major corporations are not focused solely on minimizing market competition. They can also be viewed as a beneficial step to reducing operating costs and overheads, whilst creating access to a broader customer base.
If you’re considering investing in a company that may be forging ahead with a prospective company acquisition, either as the buyer or the acquired company, this article explains the plethora of benefits and opportunities that company acquisitions can bring for big businesses.
What do major companies look for when deciding to acquire a start-up?
Acquiring agile, ambitious start-up companies that are making waves and disrupting their particular niche has long been a successful strategy for larger companies looking to breathe new life into their own business growth. In 2017, Thomson Reuters claimed there were over 50,000 acquisition deals completed worldwide, with a further $3.2 trillion worth of acquisition deals anticipated by the end of this year.
Many of the world’s leading tech companies have developed an acquisition mindset, searching continuously for investable start-ups to help them diversify, remain competitive and scale. Below are five key opportunities that a successful start-up acquisition can bring about for well-established corporations.
Penetrate new markets
A successful business start-up is generally one that identifies a gap or demand in a market and adequately meets that demand. Larger companies seek to acquire these kinds of start-ups to increase their own market share of like-for-like products; whether it’s helping to penetrate a new region, country or continent. You only have to go back to 2011 when Amazon was just starting to expand its e-commerce reach. The American firm sought to acquire UK-based start-up LoveFilm, which was an on-demand movie rental service to film fanatics based in the UK, Germany, Sweden, Denmark and Norway. The £200m acquisition was designed to help Amazon compete with Netflix in the video-on-demand industry. Of course, LoveFilm eventually ceased to exist in 2017, but by that time Amazon had managed to capture enough of the movie-on-demand demographic before launching its Amazon Prime movie streaming platform, taking video-on-demand to new heights and providing stiff competition for market leader Netflix.
A chance to increase consumer traffic at the very top of the funnel
You only have to look at our recent data on acquisitive tech to discover that the world’s leading computing giant, Microsoft has been in on the acquisition act to open its brand to a whole new demographic of prospective customers. Back in 2016, Microsoft acquired the world’s leading social network for corporate professionals, LinkedIn, in an eye-watering $26.2 billion deal. The purchase gave Microsoft overnight access to over 433 million active LinkedIn members and a demographic of professionals that are well-aligned to the software and services that Microsoft provides. How well Microsoft successfully integrates LinkedIn into its Office 365 operations remains to be seen, but this deal was a clear indication that Microsoft wanted to keep the likes of Google and Facebook at bay from the corporate demographic.
Increased PR and news exposure
There is no denying that significant company acquisitions are big news when it comes to financial and business journalists. Multi-million or even billion-dollar acquisitions get plenty of headlines both offline and online. For larger firms looking to position themselves on the radar of consumers, an acquisition demonstrates a mixture of ambition and commitment to delivering improved products or services. These headlines are music to the ears of financial investors with a CFD account that look to go long or short on the share price of listed companies based on fundamentals such as breaking news.
In the grand scheme of things, acquisitions are incredibly rare, which is why they get so many headlines. Starting up a successful company and selling it on for megabucks to a bigger firm is laudable and enchanting for everyday readers. Acquisition stories can act as an inspiration to budding entrepreneurs. Of course, we’re not suggesting that large companies acquire start-ups just for the PR boost it may bring, but it is certainly free marketing for exciting, new arrangements.
Expansion of highly competent workforce
There’s no two ways about it – sometimes, bigger businesses are just interested in your talent. That was definitely the case when Walmart completed the acquisition of e-commerce platform, Jet.com back in 2016 for $3 billion. Jet.com was founded and managed by Marc Lore, a former figurehead at Amazon. Walmart’s quest to compete in the global e-commerce market saw them acquire Jet.com to primarily obtain the services of Lore, as well as the platform’s underlying technology. Lore’s in-depth knowledge of Amazon’s inner-sanctum will not have gone unnoticed by Walmart bosses either. Walmart have since continued to acquire start-ups such as ShoeBuy and Moosejaw, to help accelerate Walmart in a plethora of e-commerce niches.
Social media giants Facebook have also taken steps to acquire talented professionals in digital in recent years. Take their staggering $19 billion purchase of WhatsApp in 2014, for instance. It was a whopping amount of money considering WhatsApp generated revenues of just $20 million in the previous year. However, in acquiring the talent within WhatsApp, the messaging platform provides both defensive and offensive value to Facebook. If the growth of the WhatsApp platform continues, Facebook could monetise it further. It also prevents Facebook unnecessarily competing for WhatsApp’s users and time. Facebook theoretically now owns a talented bunch of people that could become ‘the next Facebook’ whilst continuing to grow Facebook itself.
New cross-selling opportunities for primary products
Big businesses may also decide to acquire a product or service that is relevant to their existing customer base, whilst having an alternative value proposition or focus than their primary business, allowing this secondary product or service to be cross-sold into them. By the same token, it’s also a fresh avenue to explore for big businesses looking to cross-sell their primary business into customers of the secondary product or service.
The overall thinking behind combining two profitable products under the same company umbrella is that you can leverage both products to audiences that are most likely to be engaged and interested. Thus, helping each product or service to grow faster and become more valuable than ever before.
Microsoft has also been an excellent exponent of making company acquisitions with a view to cross-selling to a new customer demographic. The $7.5 billion purchase of GitHub has since enabled Microsoft to cross-sell its Microsoft Azure cloud hosting products to GitHub developers, whilst enticing Azure users to become GitHub customers too. Microsoft also purchased the popular open-world game Minecraft for $2.5 billion, with the aim of cross-selling Minecraft to Microsoft’s core base of Xbox customers, whilst cross-selling Xbox One to Minecraft’s global user base for free.
When it comes to big businesses acquiring innovative start-ups, there is far more strategic thinking to a deal than meets the eye. Check out some of the most spectacular company acquisitions in the last 20 years in our timeline below: