What are Small M&A’s and how do they take place?
Although acquisitions seem like the exciting business deals out of a movie or television show, they are more a routine function in the lifespan of a business. Mergers take place when two businesses want to join forces and recognize the advantages that each presents in order to increase their sales, geographic access, operational efficiencies, offerings or other capabilities. An acquisition occurs when one company purchases most or all shares of another company to become the majority shareholder or outright owner. The acquired business can either be absorbed into the company or may be kept as a sub-brand.
Most people associate a merger or acquisition with the fact that the company might not be doing well financially and therefore is looking for a way out. While this may be true in some cases, most mergers and/or acquisitions are plays to improve the product, operations, bring in competencies in terms of leadership or technology and accelerate growth of the company. The focal point of any merger or acquisition is to achieve synergies – where the two companies combined together (whole) are able to achieve more than each of the companies individually. We can see this in the example of Microsoft and LinkedIn, where Microsoft’s $26.2-billion acquisition of LinkedIn aimed to grow the professional networking site and integrate it with Microsoft’s enterprise software, such as Office 365.
Buy side perspective
1. Growth transactions vs. organic growth
Expanding through growth transactions is much faster than expanding through internal or organic growth. Organic growth happens as sales grow which takes time whereas growth through acquisitions is much faster.
2. Expand customer and geographic access
These are two of the most common reasons acquisitions take place. By getting access to a new customer base and/or expanding into new geographies through an acquisition, you can have a larger income while taking over a big part of the market share.
3. Take over competitors
Takeovers of small, innovative companies that have been getting high traction or of small-to-medium sized companies in a saturated market can help a company tackle competition in an easier manner. In the first case, buyers would inherit an innovative company as well as its current traction which could be customer, idea or product-wise traction whereas in the second situation it would come across more as a means to an end.
4. Acquire new skills or technologies
An acquisition can help you bring in the skills or technologies that your product or service currently needs or help you explore building new products and services. Staying up-to-date with technology in your segment may reduce the risk of being outdated.
5. Further development
Entrepreneurs can buy a small company/an underdeveloped product to further develop it. This helps them jump over the phase of gaining initial traction and product market fit, and speeds up the time to market.
Sell side perspective
1. Survive competition in the industry
Sometimes, a business might find itself outdated or outgunned when it comes to the latest innovations in the industry, e.g. Kodak. Or the business could be unprofitable in the industry, which can especially happen with startups. Maybe you aren’t solving for the right problem, or you just don’t have the resources needed to survive the competition. A well thought out, strategic acquisition could be of great help to the business in such cases.
2. Better opportunities with the buyer instead of working alone
To put it simply through an age old phrase: Two is better than one. An acquisition or a merger could unlock more opportunities and resources than you could find working alone.
3. Not able to scale or raise funds at the right time
If you have a good idea, product or traction but haven’t been able to scale due to a lack of resources or have been unable to raise funds, an acquisition can prove favorable for your organization and work.
How would acquisitions benefit smaller companies/startups?
There is a lot of benefit for acquisitions among smaller companies. Deals, done especially at the local or regional level can open up whole new demographics. Secondly, small companies can use each other’s resources and fill up weaknesses to achieve their goals. The key, as with partnerships, is to look at complementary goods and services, and acquire companies that can help you fill the gaps in adjacent markets.
An example of a takeover in the startup space is that of Runnr by Zomato. About 92% of Zomato’s orders at the time were fulfilled by third part logistics services and restaurant partners, while only the remaining 7-8% was self-fulfilled. Through this deal Zomato, looking to build its own fleet would be able to self-fulfill its orders with Runnr – an independent logistics company – which would also help them expand their operations in the UAE. Runnr, after the acquisition, will continue to function as an independent logistics firm delivering in other segments and would continue to retain its management team.