Why do companies acquire other companies?


3

Why is it hard for companies to learn and replicate the features of a company rather than acquiring it. All the source code including the technologies and framework used are visible to anyone.

For example: Why did Intuit acquire mint.com when Intuit can quickly build and offer the same services on its website and it wont have to shell out 170 million for it?

Technology

asked Nov 4 '09 at 08:16
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Syed
445 points

10 Answers


7

There are many reasons to acquire another company, as noted by all the posters. Fundamentally it's because technology alone isn't enough.

Some reasons are to:

  • Acquire key technology (source code, infrastructure, etc.)
  • Acquire key people or a critical team of people (ie. sum greater than the parts) 
  • Acquire intellectual property (patents etc.)
  • Diffuse an IP lawsuit (by buying-out the litigant) 
  • Combat first-mover advantage
  • Reduce time to market
  • Acquire users
  • Enter into another market 
  • Expand market share above a critical point (>60% for a 2-horse race) 
  • Directly stop a compeitor (ie. acquire, dismantle & mothball) 
  • Acquire a brand 
  • Acquire a company culture, business process or operations system that can't be quickly copied (ie. startup within a larger company).

This dovetails nicely with the meme of idea-vs-execution in the startup world: acquiring a company is akin to acquiring their execution (the critical part) versus copying just the idea.

I'm sure I've missed some reasons - add them in the comments!
 

answered Nov 4 '09 at 11:37
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User1084
363 points

4

Just duplicating technology isn't a business.

Mint's value is not just in the technology, it's in the users who have an account with them and trust them, who know their name and tell their friends.

That kind of attention and trust cannot be "built" or "executed." The only way for Intuit to own that is to buy it out.

There's lots of other reasons companies are bought of course, but that's the situation in that particular case.

answered Nov 4 '09 at 09:36
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Jason
16,241 points
  • Great. It exact;y answers what i was messingup.. formulating the right question. could also please give a brief list of other reasons your mentioned for which companies are bought. – Syed 8 years ago
  • Sure! A profitable company can be bought for any number of reasons. Holding companies buy such companies because they can move balance-sheet value (i.e. cash) into the PnL (i.e. profits). If you're not profitable, it's usually because the acquirer believes they can leverage their own infrastructure to sell much more than you can (i.e. better sales channels) OR because you're strategically useful to their greater goals (i.e. eBay buying Skype for $2b so that they could own that tech instead of a competitor). Finally, sometimes the purchase is for the people (i.e. Google), but that's rare. – Jason 8 years ago
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2

M&A (mergers and acquisitions) is a huge topic in business, and there are lost of books and academic courses that explain the logic behind it. I will name a few of the reasons, but I encourage you to read more if you are interested in the subject.

There is a lot of potential value in companies, in many different aspects of the company. Having brand recognition and a large loyal customer base is worth a lot.

Can anyone write the code that does what twitter does? Sure, but does anyone else have the user base they have?

In some cases, paying for the technology makes more sense then developing it in house due to either legal constraints, such as patents, and in other case its worth it to save the time

There are many reasons for low-tech companies to go though an M&A as well. In some cases, buying another company can lead to savings... If both companies develop or manufacture a similar product, then unifying some of the resources (headquarters, factories, departments) can lead to savings that are worth more then the original company, and it could also lead to increased market share.

Some industries have a high barrier to entry, which leads to consolidation. One example is the beer market in the U.S., where it is important to spend a lot of money on advertising and distribution, which leads to fewer and fewer players making more and more money (which is not the case in Europe, where it is legal for a beer company to own a pub. and so the choice is not left up to the consumer to which beer to buy according the which company has the best advertising).

As you can see, there are lots and lots of reasons, which vary from industry to industry. Feel free to ask followup questions, or to read more about it online.

answered Nov 4 '09 at 08:53
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Ron Ga
2,181 points

1

I recently acquired my main competitor. There was a lot of overlap on the technology side, but I wasn't interested in their technology at all. It just made sense for me to acquire them from a strategic point of view.

My main reasons for the acquisition:

  • Their user base. Although most were free users, they had a pretty large user base, some Twitter followers, and a good sized email list. This enabled me to get a head start in these areas since my own product hadn't launched yet (was in beta).
  • They had an aged PR4 site. Having a newer PR1 site, this certainly helps me out.
  • I could benefit from all of their marketing efforts (writeups, backlinks, etc.)
  • I inherited all of their market research, user feedback, and application usage statistics. While I have to be careful in how I interpret this information, it's extremely useful to have.
  • They had fantastic design which I could then own. This may sound trivial/silly but aesthetics goes a long way when the market is designers. Also, there were a few modules of their app that were great and I can now integrate into my own app (not many).

It didn't hurt that I was able to acquire them for a very cheap price, plus I was able to take a competitor out of the picture.

answered Nov 10 '09 at 15:18
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Ruben
181 points
  • this is great first-hand experience - not just speculation on other companies. – Tim J 8 years ago
  • ruben, not to jinx your project or wish bad lucck --how often does this happen that you acquire a certain company and then immediately users go away - for example many people fear that if MS acquires yahoo then yahoo users are gonna leave yahoo----i am just interested in the knowing other risks as well. – Syed 8 years ago
  • You better believe that losing users is a very real risk. There are a lot of factors to think about when considering how to handle this problem. I knew that some people wouldn't be happy with the change in ownership, but I didn't think it would be a significant number of people. Being that this company was new and they fumbled the initial release, loyalty was a little on the low side. They wanted something better, so I made it my job to appeal to that. Even then, I had to reassure them that the direction I was taking the company in was going to benefit them a great deal (easier said than done) – Ruben 8 years ago
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1

Understanding the psychology of business always comes down to the consideration of two things- time and money.

Both are precious, finite and interchangeable. In business (as in life), there never seems enough of either.

But we most choose between them. So most corporations.

Technology giants often have money to burn, but the breakneck speed at which technology evolves assures that even the largest, richest and most powerful company cannot afford to waste time- if it does, it will not remain large, rich or powerful for very long. Ask AOL.

The great thing about all manner of financial machinations is that they are always so predictable- whatever is cheapest (simplest and fastest) will always be done. There are few, if any exceptions to this, the golden rule of capitalism.

Time is the most precious resource of all, and it is the one thing that those who can afford it will always buy. That is what a technology acquisition is- an purchase of time.

Google bought youtube for one reason- they could afford it. That's it. Its as simple as that.

Sure, it cost them 1.7 billion dollars, but that is an excellent price for the rarest commodity in existence.

Now Google doesn't have to spend enormous amounts of time and money developing, testing, patenting and marketing a rival technology to attempt to compete with a well-known giant that completely dominates a major technology market. The acquisition of youtube virtually eliminates the need for these resources, not to mention the significant risks of mobilizing them. Success is by no means a sure thing. But an acquisition is, or at least is the closest thing to it.

1.7 billion dollars is a lot of money. But perhaps not that much to Google, which, as I have already said, has money to burn.

The relatively affordable, low-risk acquisition of a major new market powerhouse assures that, sometime in the future, Google will be able to burn even more.

And isn't having enough money to burn what we all want anyway?

answered Oct 7 '11 at 10:00
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Projectix
1 point

1

Buying a competitor is a good strategy to kill the competition. Google buying Youtube (Google Video competitor), Microsoft's deal with Yahoo (Bing competitor), Intuit buying Mint (Quickbooks competitor), there are tons of other examples like these ones. Buy your competitor(s), so you can control the prices, innovation and user base.

answered Nov 4 '09 at 09:03
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Boolean
388 points
  • Why couldnt google ..with its smart engineer develop a videosharing site better than youtube rathern than shelling out 1.5 billion dollars!!! google could have comeup with a similar site if not better for less than 50 million dollars rathern than paying 1.5 billion dollars. – Syed 8 years ago
  • Google did try - it was Google Video, and it was no great competition to YouTube. 'Technology alone does not a business make' (Yoda, ep IV, director's cut). – User1084 8 years ago
  • The answer is "user base". Google Video didn't have a user base, YouTube did. YouTube had the network effect because everybody knew YouTube, nobody knew Google Video. It was cheaper in the long run to buy the users from YouTube than it was to acquire the users from scratch, not to mention the strong YouTube brand and all that content. – Bstpierre 8 years ago
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0

Because it is cheaper and a lot faster than building a competitive similar product, market it, brand it, grow a user base, etc... plus they also get employees (without the long and difficult task of hiring) that will continue with product development, maintenance and support without too much trouble - IMO.

answered Nov 1 '10 at 14:30
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Ricardo
4,815 points

0

From a purely economical point of view - apart from acquiring their user base - they also acquire the team that has made the product successful.
AOL acquired TechCrunch and said they didn't want to lose whatever makes TechCrunch successful.

Plus, the acquired company's people already know each other which saves some money on team building.

answered Nov 2 '10 at 08:45
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Vergil Penkov
141 points

0

Bear in mind that when a company is acquired, its customer base goes with it.
Acquisitions are a great way for larger companies to eat up market share fast!

Need to grow your customers base by 10% this year?
Have some money to spend?
Then find a competitor that has a good customer base, that is willing to sell, and that you would like to see out of the way and ... bingo!
You just got 1000 more customers in a go, one competitor less to worry about, and a lot of publicity in the media.
Then you can trash their product... you didn't want it anyway and you have invested so much in building yours that you might as well keep it.

:)

answered Feb 27 '10 at 04:55
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Mike
825 points

0

Hmm, if they could, they would. They can't, so they buy it.

There are TONS of reasons: Lack of capability, lack of capacity, different internal structure/culture, time to market, existing customer base, and the list goes on for miles.

If you are an old company that missed the boat on a new technology that will put you out of business, you need to acquire a new company that has the technology (and maybe the customers) that you need.

Many companies have done this over the centuries.

answered Nov 4 '09 at 08:54
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Gabriel Magana
3,103 points
  • why is it hard to produce similar code as of competitor(exlcuding the patented stuff), infact there are more chances of you producing even better product, interface and features. why did it become so difficult for INTUIT to take on mint.com and produce even better product rathern than spending 170million dollars. – Syed 8 years ago
  • I cannot tell (I wasn't there), but Intuit maybe did not want to wait, it is far easier to buy up your biggest competitor while it is young than start competing playing catch up. Maybe the $170M was cheap, and they might as well buy it while it is that small than not be able to buy it later when it is a serious competitor. Also keep in mind that Intuit is very good at desktop apps, not so good at web apps. – Gabriel Magana 8 years ago
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