Why big companies buy small companies and startups
While profit is always the end goal, it can be surprisingly secondary in the short-to-mid term of a well-planned acquisition strategy.
To the untrained eye, there are two types of acquisitions: no-brainers and head scratchers. The no-brainers include those like Disney’s acquisition of Marvel ($4 billion back in 2009) and Salesforce snatching the messaging platform Slack (the two SaaS leaders became one to the tune of $27.7 billion in 2021). Then there are the headscratchers — the ones where, at first glance, there appears to be no clear connection between acquirer and acquiree (think eBay nabbing Skype for $2.6 billion in 2005) or when the acquiree is puny.
Headscratchers can confound even seasoned economists and the savviest of businessmen. Remember when Facebook bought Instagram in 2012 for a whopping $1 billion? At the time, Insta was a startup with zero revenue and a workforce of 13, so many industry experts fumed that Zuckerberg hadn’t consulted with his board of directors or done adequate due diligence; others thought he’d simply lost his mind.
Fast-forward a decade and Instagram now boasts yearly revenues of over $51 billion, proof that a startup’s revenue (or lack thereof) can mean next to nothing when it comes to a smart acquisition. Even amidst global market downturns, the appetite for M&As in certain industries remains unaffected: Fintech acquisitions, for example, grew 46 percent YoY in 2022, surpassing the record-breaking performance of the previous year. (As one would expect, banks have a particular appetite for acquiring fintechs).
Eliminate the competition
Facebook’s original proposition was all about sharing photos and life experiences and then, suddenly, Instagram was doing it better. Facebook bought Instagram because it was an existential threat.
Together with Snapchat, Insta had quickly become the darling of teenagers all over the world — many of whom couldn’t stand sharing a social media presence with their parents on Facebook. Letting Insta continue on its trajectory could have made Facebook obsolete — and another high-profile social media has-been like MySpace.
Moreover, there was the mobile component. Back then, Facebook was primarily a desktop platform, while Instagram was at the forefront in mobile. By scooping up Instagram, Facebook eliminated the risk that another company would beat them to it, caught the mobile wave, and kept their business relevant — all in one fell swoop.
A couple of years later, Facebook would repeat the strategy by acquiring WhatsApp, a direct competitor to Facebook’s Messenger, for the much larger sum of $19 billion.
Diversify the clientele
It’s a perennial axiom in business: Client acquisition costs much more than retaining existing ones. For large enterprises, when factoring in variables such as geographical diversification, market share growth, and conversion rates, acquiring a smaller company means inheriting a valuable client roster that would be cost prohibitive to build from scratch — like when Amazon spent $3.9B to take over One Medical’s 200+ brick-and-mortar primary care offices spread out across 24 cities in the US.
Another case in point: In 2021, wellness-focused SaaS provider Mindbody dished out $1 billion to acquire the subscription-based fitness company Classpass (also our client). Previously, Mindbody’s core customers were fitness centers aiming to modernize their premises with dedicated fitness applications and related software infrastructure — a B2B endeavor. The acquisition of Classpass made Mindbody also in charge of filling the classes of those same fitness centers, thus giving the acquirer a robust B2C clientele overnight.
In some cases, it’s merely a matter of adapting to unexpected circumstances. The demand for home healthcare skyrocketed during the COVID pandemic, and ultimately changed the behavior of customers who became accustomed to remote care rather than personal visits to clinics — and even preferred remote care. Sensing the opportunity, US insurance giant UnitedHealth secured LHC group for $5.4 million to increase their home healthcare services for the elderly and other patients who have troubles showing up physically.
Obtain technology and expertise
Next up: the Google Approach. Google’s parent company Alphabet has bought nearly over 250 companies that, in the vast majority of cases, improved Google’s fledgling services in a particular field. For example:
DeepMind: This AI pioneer offered Google cutting-edge machine learning algorithms and neural network techniques that wound up being key to Google’s infrastructure and products (including creating more natural voices for Google Assistant).
Nest: With the market for smart, connected homes gaining traction, Nest’s IoT know-how was an obvious must-have for a tech giant looking to automate homes — and collect data from users.
Developing new technologies from scratch requires millions of dollars and tens of thousands of work-hours. Since specialized startups have already put in the time to develop the technology, giant corporations opt for a buyout because it’s a time saver.
Attract and retain the best talent
Good timing and flat-out luck certainly help in making a company succeed, but it’s often about how talented, knowledgeable, and well-connected the employees are.
In any merger or acquisition, determining how to retain and incorporate the best and brightest talent from the acquiree is key to the process. Back in the crisis-ridden year of 2008, when gaming giant Activision proposed merging with Vivendi’s Blizzard Entertainment — developers of the record-breaking hit World of Warcraft — it knew no corporate upheaval was needed: Both companies excelled at their respective core niches of console and PC gaming. Both companies were generating billion-dollar annual revenue streams, and both companies clearly knew what they were doing — and they could do even better together.
Vivendi retained both Activision and Blizzard’s founders and CEOs, Robert Kotick and Michael Morhaime, as leaders of the newly-formed Activision Blizzard. By granting high levels of independence between subsidiaries while also enabling and encouraging talent sharing between them, Activision Blizzard kept its streak of smash hit titles and became the second gaming company ever to join the S&P 500 in 2015.
Update the brand’s image
Consumers are becoming increasingly aware of what their wallets ultimately sponsor. Enterprises with outdated market practices and ethics have been singled out by clients demanding corporate responsibility to, as Google’s original motto once pledged, “Don’t be evil.”
Reputational damage happens even without sinister motives, however. Time’s arrow is enough to degrade a brand from hip to boomer in no time if its leaders are asleep at the wheel, and savvy acquisitions are a great way to showcase how a company is invested into modernizing itself. Plus, big acquisitions often come with the bonus of free media coverage, adding extra value to this tactic.
The 1983-founded fintech software company Intuit, for instance, isn’t a brand most regular citizens would know much about. In 2021, to be perceived as more accessible towards small business customers, the enterprise acquired the AI-powered email marketing startup Mailchimp for $12 billion — a company cool enough to win a Grand Prix at Cannes Lions, considered the Oscars of the advertising industry. In the quarter following the acquisition, Intuit’s stock value rose about 21 percent.
A firsthand account of success
By partnering with startups for long periods, we often have an up close view as companies develop and mature on their journey to success.
DealCloud, the fintech-focused CRM provider, had an ongoing two-year partnership with Vention when it was acquired by private equity management company Intapp. By modernizing Dealcloud’s former infrastructure and implementing robust web and mobile CRM apps, we ensured that the company’s digital transformation would reflect on its value. A deal done right: We keep on developing further AI and cloud solutions to help them stay on top of their game.
Freshly, a meal delivery service, enjoyed steady and strong growth for as long as we partnered with them. Starting in 2015, we structured and future-proofed their platform with about four engineers per year so Freshly could meet ever-increasing demand. Years of hard work paid off: In 2020, Nestlé acquired Freshly for $1.5 billion, allowing the company to triple the number of menu items offered without changing the company’s fundamentals or overall autonomy.
Similar to our collaborations with Dealcloud and Freshly, we've been a long-term partner for 500+ startups, playing a key role in their journey to success. Whether it's through equipping startups with critical software engineering expertise or offering strategic tech consulting, we've been instrumental in helping startups achieve significant milestones, making them prime candidates for acquisition.
When it comes to merger and acquisition strategies, always remember that financials aren’t always the be-all-and-end-all. Although it’s somewhat common for startups to launch with the goal of selling to giants like Facebook or Google, what ultimately makes or breaks a startup is the novelty it brings to the tech table — the result of a great idea, a lot of effort, and a tad pinch of unbridled passion. Not to mention luck!
