Why do Companies Acquire Other Startups and Companies?

Harshit Verma Harshit Verma
Nov 29, 2021 10 min read
Why do Companies Acquire Other Startups and Companies?

“Survival of the fittest” is a phrase the biologist Charles Darwin popularised. This denotes in biology the fact that, for an organism to live and survive in extreme nature, it has to be the fittest. So, the laymen implication is that the fittest are mostly entitled to survive. This is a widely used term in biology, whenever someone studies a species. In fact, every species that you see today is the fittest left out of past versions of species. The process of evolution leaves the fittest and curbs the rest of all.

While “survival of the fittest” is the truth for the biological world, it seems that the same phrase cannot be used for the trade world. Businesses all over the world need not follow the trend. However a little tweak in that phrase will perfectly fit how the business world behaves. We can say that the business world follows the thumb rule of “Survival of the biggest”. Big corporations with deep pockets run the show. Everywhere you see, its valuations, employees magnitude, and scaling demographics are the prime factors that businesses run after.

This is not as simple as it sounds. The reason being that every corporation in the world was at a time, nothing but small and fringe. The rough path that these small businesses go through makes them tough and with the flow of time they become fatter and bigger. The traditional path is to go bootstrapped, that is to use its own revenue for growth. Some follow raising capital techniques to go and scale.

One of the most famous (now) and new trends that the businesses follow to go big is something other than these. It is through the way of acquisitions. So what does it mean ? How does it work ? and why do businesses resort to acquiring other businesses ? These are some questions which we will try to figure out in this article. Read on to discover otherwise unnoticed details.

What do you mean by an Acquisition?
Why do Companies Acquire other Companies?
Types of Acquisitions
Few Famous Examples for Understanding Acquistion
FAQ

What do you mean by an Acquisition?

Acquisition means buying other corporations. Businesses all over the world follow this method to grow and scale either business. Not to mention that this is probably the fastest way to scale. So, acquisition occurs when one company obtains a majority stake in the other (target) firm, which retains its name and its legal structure.

This can be done to foster your own growth or it can be also done to revive a dying business. For example, in the year 2002, PayPal was having a rough time and eBay stepped in as a hero to save its life. There are case studies or examples in later of this article but first let us know some basics.

There are many ways a company can acquire some other company. We will discuss them in detail now. However there can be many types but there are always some prime types of acquisitions. Before jumping into the types of acquisitions, we need to learn why companies do that in the first place.


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Why do Companies Acquire other Companies?

There are many benefits to acquiring. That is why big businesses are always looking for good businesses to acquire. They kind of prey on them. The benefits can turn into  disadvantages too if the acquired business is not good. So, the acquirer has to be choosy in this matter. Here we are discussing some of the best known benefits of acquiring other businesses. Read on to find out the reason for which businesses acquire,

Synergy

The word synergy means to combine two organisations or substances in order to make the resultant substance more effective than the individual power of every combined corporation. This is one of the biggest reasons why big companies like to acquire other small corporations.

The resulting organisation after the acquiring process turns out to be more effective and efficient than the previous two individual organisations. This helps in achieving more power and thus to get more market share in whatever product the companies are dealing in. This also ensures that both the companies get bigger market share than they were getting before the acquisition. This is a win-win situation for both the parties, which becomes now a single unit.

Reducing Competition

When a company acquires some other company, the resultant company faces less competition. Simply stated, earlier both the companies were competing for the same market share and with similar products.

With the inception of acquiring, both the companies join hands to eliminate the competition and run towards the same goal of owning more market share. This however requires both the acquirer and the acquiree to be bound by a contract.

The acquiree may agree to the acquiring terms only after some handsome paycheck. This makes it a little more complex than it looks on the outside. Moreover, for this transaction to happen we need to calculate the exact value of the acquired company which is a time consuming process. Anyhow, once it happens, eliminates the competition.

Growth and Performance

Another reason for acquiring a business is growth. This point can be said as a subpoint of the first mentioned reason. A company can grow and scale significantly without doing much hard work by itself.

Acquiring can do the work for the organisation. It gets the opportunity of growth while achieving the goal of efficiency. You get to use the goodwill of the acquired company and the reach of that company to make your own organisation touch the sky. However, choosing which corporation to acquire is a challenge in itself. If done correctly, it can be a recipe for success and if done wrongly, can make you the architect of your own downfall.

The Advantage on Cost Savings

When a business acquires another business, it happens mostly in between businesses of the same product. When two same organisations of supply chain assimilates then this results in cost savings for the resulting company. Thus, by buying out a distributor or supplier of a product, businesses can lower their cost up to a large extent. This helps in achieving efficiency in manufacturing products and thus getting a much larger share of the product market.


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Types of Acquisitions

There can be many forms and types of acquisitions. They can differ from one to another with a change in organisation to organisation. There are however, four basic and most widely accepted types. Those four types we are going to list here.

Horizontal Acquisition

If you're a math fan, Horizontal means a flat two dimensional line on a plane. In a market, each organisation has to deliver some sort of value in order to survive. Not only this, they have to strive to be better than everybody else in that segment of product. This competition can be easily eliminated by acquiring the other standing organisation. So horizontal acquisitions are those acquisitions in which a firm acquires another similar firm (in a horizontal direction) to eliminate competition.

Vertical Acquisition

As horizontal is a flat line, Vertical is a perpendicular, that is a standing line from ground. In horizontal acquiring we saw firms acquire firms which are in almost the same shoulder as the acquirer. In vertical, we don't look at some flat line, we just acquire forward or backward of the supply chain. For example, a wholesaler who is a big wholesaler in a market can acquire the manufacturer of the product in order to supply the product at cheap rates. This is known as backward vertical acquisition. In the same manner, if that wholesaler acquires a retailer, then it will be called a forward vertical acquisition. In this case he/she will be able to be more consumer facing and consumer centric.

Congeneric Acquisition

This acquisition is a little bit different than types mentioned before. So, in this modern world when time is really a luxury, we tend to go to shopping malls to get everything at one place. This helps us to save time travelling. This concept inspired the mode of Congeneric acquisition, which says to acquire businesses to provide a one-stop destination for your clients. For example, a bank whose big customers require more frequent travel around the world may need travel insurance.

After identifying this opportunity, that bank can buy or acquire an insurance company in order to help get its customers a travel insurance plan. This makes them more profitable and provides the customers with a one stop market. This reduces hassle for both the parties.

Conglomerate Acquisition

This type takes the acquisition models to a whole new level. It is an acquisition between companies that are totally different. They have different products or services, different demographics, different business and revenue models. Even with all these disparities, they go on and initiate the acquiring process.

The reason for such an acquisition happening is that the company is trying to go on unexplored territories. They want to expand to new places and to a different product market. This type of diversification strategy helps both the firms in diversification of their businesses, Synergy benefits, increasing customers magnitude, and to achieve better economies in scale.

One famous example of this type of acquisition can be the merger between PayPal and eBay, both the companies are totally different and PayPal in 2002 was struggling to play in the payments markets.

eBay acquired it by paying a sum like a billion dollars and kept PayPal going. Since then PayPal is able to revolutionise payments in the whole of the world. This is what a good acquisition can do to companies and it is still considered a benchmark in silicon valley.

Few Famous Examples for Understanding Acquistion

We all are fans of big and flashy organisations but most often we don’t get to see the BTS (Behind the scenes). Almost every big organisation has acquired some other businesses to foster growth. They were small too at some point in time, but now stand at a paramount position. Here are some examples of a few famous behemoths.

Apple bought Siri (the automatic personal assistant) in 2010 to enhance its then newly launched iPhones. It became an instant hit and iPhone users loved it. So, In 2014, Apple purchased Novauris Technologies, which was a company specialised in speech-recognition-technology, in order to further enhance Siri’s capabilities. In 2014, Apple also purchased Beats Electronics, which had recently launched a music-streaming service. Both the companies now enjoy the biggest market share in their product segments.

Speaking at India level, we are not too far off the list. We have seen many acquisitions in our business world as well. Startups do it, established companies have done it.

Say for example Zomato in the year 2020 acquired Uber eats. In January 2020, Zomato had acquired Uber Eats' India operations in a non-cash deal for ₹1,376 crore, excluding an amount of Rs 248 crore payable towards GST. As part of the deal, Zomato issued 76,376 compulsorily convertible cumulative preference shares (CCPS), each valued at ₹180,153, to Uber India. This acquisition was done to make Zomato scale and touch new heights, which it did. Zomato went on to even get listed in Indian stock exchange on July 27, 2021. Its story has been repeatedly referred to as a great success story in our startup ecosystem.

Another big acquisition which the Indian startup ecosystem recently saw was BYJU’s acquiring Akash Institute for a whopping billion dollars. Byju's is an educational and technology faced startup, referred to as an Ed-tech company. On the other hand Akash institutions are one of India’s biggest coaching institutes for competitive exams. This acquisition made Byju's spread its wings as the company prepares to take a flight that will cover the whole of India. IPO-Bound BYJU's Spent More Than $2.4 Bn On Acquisitions In 2021

Top Acquisitions of Byju's
Top Acquisitions of Byju's

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Conclusion

So we read what acquisition is and why companies acquire other companies. They can be a great way to scale in a country like India. Not to mention that the second most populous country is still in its development phase. Despite being hard to perform, acquiring businesses has become famous among not just big companies but new age startups too. New age startups like Zomato or BYJUs are open to buy corporations to scale new heights.

There is however, indeed no magic formula for a successful acquisition. All we can do and hope and research for, is just better probabilities. Each deal has its own research and its own personal strategies at the back. But an acquisition is mostly seen as a neat method to scale, if done correctly. India has seen multiple acquisitions and it has seen economics of startups at scale too.

This is a new world where leverage is at its probable peak. Anyone from anywhere can use it, but the thing that differs is how the person uses it. Use it well and you will fly, use it badly and you may become the architect of your own downfall. Some people may want to quote that “there are no losses, only learnings” and I agree with that.

FAQ

Why do companies buy out other companies?

The major reasons companies acquire other companies to seek economies of scale, diversification, greater market share, increased synergy, cost reductions, or new niche offerings.

Why companies merge or acquire?

The most common factor companies acquire other companies are to grow its market share and reduce the costs of developing business activities.

How do company acquisitions work?

An acquisition is when a company acquires the target company's shares to make decisions about the newly acquired assets.

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