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Thursday, November 21, 2019

C-Suite Advisory

10 Reasons Why Large Companies Are Doing M&A

Why do larger companies acquire startups? If you’re a startup founder or even entrepreneur strategizing a venture you can take all the way through from launch to glitzy exit, you’ve got to know why a larger company would buy you.

Here are ten of the most common M&A strategies of larger companies, and what you can serve them with to be an attractive acquisition offer. 

  1. Top Talent
    One of the most talked about mergers and acquisitions strategies of large companies is the acquihire. To absorb top talent in their own or a new field. They may just be seen as the best in the business, which they can’t afford working for the competition one day soon. Or because it is far cheaper to acquire a great team of talented people that already work well together.
    This is one of the toughest and most expensive and time consuming challenges for any business of any size. So, while these deal may seem expensive, wait until you try to put together a team yourself.
  2. Growth
    The markets are vicious and fickle. Failing to deliver consistent growth can be seriously dangerous, even for large incumbents. The one thing startups do very well is deliver on great growth numbers.
    There are many metrics to choose from that can make for great PR stories and make investors happy. The bigger you are the slower you grow. The harder it is just to hold your own, nevermind actually expanding.
  3. Take Out the Competition
    Many of the founders with great exits that I’ve interviewed on the DealMakers Podcast have sold to their competitors. It’s really the most generous way they can take you out. Some will try to crush you with advertising spend, the press and losing money to gain ground. Others will just try to sue you out of business.
    If those aren’t cheaper alternatives that are working for them, then they might just buy you.
  4. Profitability and the Economies of Scale
    Companies like Oracle have been known to make acquisitions for revenue. Acquiring other businesses that are profitable and are producing solid streams of income is just good business sense. It’s what Warren Buffett has built his Berkshire Hathaway empire on.
    It’s not just about growing revenues either but is equally a safety play that creates diversification and ensures the survival of the acquiring entity by insulating it to larger changes.
    This income can also be necessary for preventing losing ground to rivals who could be growing their war chests to dominate visibility in the market.
    Then there are economies of scale, which can produce higher profits across all divisions.
  5. Supply Chain Pricing Power
    One of the most strategic uses of mergers and acquisitions is to improve the profitability of existing operations.
    For example, acquiring manufacturers or drone companies to create savings on other parts of the process, and fatten profit margins.
    This can provide a great edge, especially over other startups who may try to enter your industry.
  6. Upsells, Cross-Selling and the Customer Journey
    Following on from the last point, acquisitions and mergers can be used to extend ownership over the customer journey. This may help reach them earlier, serve them longer, or just augment their life with your brand in similar vertices.
    Like P&G’s acquisition of Gillette, or Amazon’s acquisition of Whole Foods. If you already have a large business, customer base and sales systems, it is easy to integrate new products and sell them very profitably. That can work in both directions under a merger like this.
  7. They are Looking for Their Own Exit
    Other larger startups racing to their own exit may simply be wanting to roll up additional companies to boost their marketability in an acquisition or going public. Something you may also plan to do.
  8. To Survive by Staying Relevant
    Once hot brand names seem to be getting left in the dust faster and fast. Trends just keep accelerating thanks to new technology. It’s expensive to make companies like Microsoft and IBM cool again. Facebook has mostly survived by acquiring hotter and more relevant brands like Instagram and WhatsApp. Just as Apple has acquired Siri and Dr. Dre’s Beats. Apple may do more to absorb its acquisitions into its own brand, while Facebook is falling into the background.
  9. Business Transformations
    Some large companies are needing to go through complete transformations and massive pivots themselves in order to stay in business.
    Think about the Kodak’s of this world. There will be many others who find what they built their business own is no longer needed too. They may not be positioned to just stomp into a new direction like Amazon with its stores.
    They are going to have to change the DNA of what they are about.
  10. Entering New Markets
    Whether geographically or in terms of product, acquisitions and mergers can be an efficient way to enter new markets.
    It can be especially important for getting the culture right and nailing the customer expectations the first time, versus lengthy and extremely expensive trial and error.
    Before getting to this stage, startups themselves can also strategically choose investors who can help them better and more seamlessly enter new markets too.

Ultimately, if you want to keep an M&A deal on the table as an option for a startup exit, you’ll need to fall into one of these baskets to be attractive to a larger company. Why will they buy you?


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Alejandro Cremades
Alejandro Cremades, co founder at Panthera Advisors, a serial entrepreneur. and the author of the The Art of Startup Fundraising. With a foreword by Shark Tank star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business. Alejandro Cremades is an opinion columnist for the CEOWORLD magazine.
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