Business truly is a dog-eat-dog world. Companies absorb each other all the time, with entire industries developed to serve the complex and lucrative mergers and acquisitions market. Some of the largest have crashed in spectacular fashion. Others—typically, small, astute, and engineered with precision—have enabled the acquirer to deliver on a carefully-honed strategy.
What typically motivates corporate acquisitions, and what can companies do to ensure they succeed?
Companies justify buying each other in a variety of legitimate ways, but boil it down and you come up with two main motivators, suggests the Harvard Business Review: improving current performance, or transforming a business model.
The first typically involves using a target company’s resources to enhance your own business. Those resources include both ‘soft’ assets, such as employees, and hard ones, such as manufacturing plants or retail stores. Significantly, those resources can also include customers. Companies that acquire each other to expand their core business audience—either domestically or in new geographical regions—are leveraging the target’s resources for growth.
This growth is typically accompanied by a healthy amount of streamlining, in which the acquirer finds new efficiencies by marrying the target company’s resources with its own. Acquirers can improve operating efficiency both in the target firm and internally, by consolidating staff and getting rid of assets that are underperforming.
Depending on the industry that the acquirer occupies, this streamlining can also benefit the company by cutting out excess capacity. Mature industries typically develop excess capacity as companies invest in production, explains McKinsey (conversely, investment in immature industries typically focuses on innovation). By acquiring a company and shuttering some of its less profitable operations, an incumbent can thin out market capacity and adjust the ration of supply to demand.
Evolve the business model
While bolstering performance for an existing business model is a long-established and well-understood approach to mergers and acquisitions, HBR’s second strategy offers the biggest potential for significant growth. It can also help companies to reinvent themselves as business conditions change.
Businesses focused on innovation will often acquire companies for their intellectual property, or their talent. This is a common tactic for Google, which frequently picks up firms based upon a mixture of both. In Google’s case, this often serves specific purposes, such as bolstering businesses related to its core search model, or making strategic investments in the future of technology as a whole. Other companies may acquire emerging technology firms to help them stay at the cutting edge of their own industries because it’s cheaper to buy an established product than it is to develop one’s own.
Some companies with a strong brand, like Apple, will often acquire other firms on the quiet for this purpose and effectively kill off their branding, incorporating their technology into its own product. Others, like Yahoo with its $35 million acquisition of Flickr in 2005, may allow the technology to live on under its own brand. The acquirer has to support its new company with a degree of autonomy, though, lest the acquired brand lose its way.
Keep the future top of mind
In many cases, larger companies can set the scene for their transformation by snapping up early-stage technology firms with the potential to disrupt entire industries. Such was the case with EMC, which saw an opportunity when it bought virtualization company VMware in 2004 for $625 million. It spun out just 15 percent of its shares in the firm three years later for almost $1 billion, but the money was only part of the story: it also effectively owned an entire subsector of the market at the time, and one that fit perfectly into its existing IT customer base.
When a large company acquires a smaller one with an innovative technology, it also gives the smaller firm the opportunity to expand its reach, accessing more of the market. This is a common strategy for IBM, for example, which acquires smaller businesses and then commandeers its huge industry muscle and massive customer base to accelerate the acquired company’s success.
Each of these goals and subgoals for merger and acquisition activity can yield results. The key is to understand those goals up front, and to have an eye on the long game. McKinsey suggests that the most successful acquirers understand the value that the merger will create going into the deal. Ideally, that value will be part of a bigger corporate objective that may span years—and each acquisition will specifically support that longer-term goal. For instance, if the acquirer wants to become the third-largest vendor in a separate but related product category by the end of the decade, or wants to source a percentage of its revenues from an emerging geographical market within three years.
Having long-term goals such as these in its playbook will help a company to find the right acquisition targets, and set the correct parameters for them. With any combination of problems apt to complicate a deal, at the very least your motivation and your aspirations should be concrete.