Why do big companies buy small companies? Let’s rephrase, why did Microsoft pick interest in acquiring linkedIn? Keep reading to find out.
On the stock market floor, the office is abuzz with sonorous sound not made by stringed instruments but from systems clicking and constant display of visual trading patterns on the screen.
Traders, investors, and business owners watch out for these patterns to help them make informed trading decisions in various financial markets such as commodities, stocks, and currencies.
These visual patterns are also a culmination of a detailed analysis of the value of a company or organization based on prospect and industry status. Investors are more concerned about investing in profitable companies with readily available growth potential.
So, distressed companies or those that are staggeringly slow and unable to sustain the core objectives of their ventures are often seen grappling with the possibility of bowing out of business and ceding their values to more prominent companies.
What advantage do these bigger companies have over the smaller ones that enhance the former’s ability to acquire the latter?
What are the accrued benefits of these bigger companies when they make these acquisitions?
What are the factors that set these companies apart from other ones? Why do these smaller companies pale out in comparison to them?
All the factors that make them different are what constitute the content of the next section in this article.
Strong Management Team
The management of an organization presides over most of the decisions that steer the wheel of the firm. They are behind the wheel driving these decisions, which can either make or mare the firm.
Good management with the foresight for objectivity and goal attainment will steer this wheel in the right direction to grow the business and ensure its sustainability.
The functions of management are encapsulated in these significant functions which are.
- Organizing the company
- Planning the structure and operation of the company
- Controlling significant decisions of the company
- Leading the company towards achieving set targets and goals
When these qualities are not efficient enough to drive the productivity of an organization, the tendency to become stagnant with low output becomes the underlying issue faced by such organizations.
Business Methodology
The method employed in conducting the operation of the business is also tied to its efficiency and productivity.
These big companies are strategically positioned to maximize every business potential presented by investors. They utilize a methodology that enhances their resources’ sustainability and adequate risk management.
In this vein, they can harness business opportunities that promote their growth and profitability.
Proper Management Of Cash Flow & Assets
The reason behind most businesses’ liquidation is poor financial management. The lack of accountability and inappropriate use of financial resources could spell doom for a business, especially when the business management is tied to loans and business incentives.
Some of these bigger companies have a proper financial structure that has been put in place to enhance business operations, mitigate financial crises, and sustain the profitability of the business venture.
A Team Of Skilled Workers
If the management of an organization steers the wheel, then the team propels the engines. You will agree with me that a group of skilled workers conveys the decision of productivity from its ideation stage to its activation stage.
One of the factors that also enhances the profitability of these big companies is their team workforce. But unfortunately, a team of poor workers can become a clog in the wheel of productivity in a business.
Factors That Deter The Growth Of Small Companies
Small companies differ in numerous ways from the big ones. They are different in size, capacity, staff strength, financial resources, and many other ways.
We will be considering the factors that deter their growth and limit productivity.
Poor Managerial Structure
As earlier mentioned in the previous section of this article, the significance of the management team in an organization cannot be ignored as this can either lower or improve productivity and objectivity.
So, most of these small companies have a poor managerial structure that influences the decisions that drive the operation of the business. If these poor decisions are implemented, the consequences can be devastating, especially for startups.
Lack Of Labor & Capital
The lack of workforce or not having enough labor can slow down the operation of a business. The same applies to the absence of capital which is the central operational factor for any business.
Due to a lack of funding, these organizations cannot hire the number of workers required to steer the workforce in the right direction. In addition, lack of adequate capital resources is another factor that can limit the achievement of business goals.
Nature Of The Market
If a market is not fast-paced, it could be a staggering investment for business owners. Some markets have a low-level entry for businesses while others are pretty high, and for small businesses, surviving in these markets can become an issue.
Nature Of Business Industry
The emergence of digital space has enabled many businesses to thrive, but the entrance of these businesses presents a lot of competition.
This competitiveness can become a dilemma for small businesses as they constantly try to navigate the waters of industrialization. Only those with a brand or business strategy can develop innovative ideas that will enhance their competitive skill and market penetration.
Making Acquisition Decisions; Things To Consider
To acquire a company from another is a giant leap for most organizations, and making sure the acquisition process follows all the requirements obtainable by law is another thing.
There are things to consider before making acquisition decisions. Listed here are some of the steps.
- Before the acquisition, companies are advised to ensure that they buy the organization’s assets and not the business, as this will prevent a transfer of risks such as debts, loans, and other unresolved financial issues.
- Enquire about the company’s payroll and sales taxes, as this gives you an overview of the employment tax payment.
- The buyer should endeavor to ascertain who is dealing with the accounts receivable in the company that is being acquired to grasp any outstanding debts and who will be responsible for collecting these debts.
- Negotiate around the purchase to know if you can take over the seller’s lease.
- A negotiation can be initiated to make the seller provide a “letter of intent,” which is an agreement between the seller and the buyer containing the terms and agreement binding the deed of sales.
- Be on the lookout for bulk sales law as most countries and states require a buyer to notify existing creditors of purchased business as these people can seek legal actions to stop the sales deal.
- A buyer should strive to get an indemnity from the seller because of outstanding legal actions. This makes the new owner not liable for any previous legal actions.
- Have the seller hang around for a while to enable them to walk you through some operational modalities within the acquired firm.
- The buyer should try and get to know the employees of the acquired company because this step will help to strengthen the working relationship that will ensue between the two-party
Why Big Companies Buy Small Companies
Several big companies have taken steps to acquire small companies for different purposes. The reason for this will form the basis for the next section of this article.
Most of these big companies buy out the small companies to;
Do Away With Competition
Most of these mergers or purchases have been on the terms of risk elimination. The competitiveness in most industries is alarmingly high.
To reduce the competition to its barest minimum, most of these big companies search for distressed firms or those shrouded in dire financial situations to acquire their assets and do away with the competition.
Strengthen Their Client Base
Furthermore, big companies also buy small companies to strengthen their customer base because these acquisitions lead to mergers that benefit the buyer.
Transfer Of Technology And Expertise
These acquisitions can bring a wealth of technology and expertise as the new buyer can leverage these operational structures present within the acquired organization.
Repositioning Of The Brand
This step can also be a strategy employed by the buyer to reposition the business for more objective production.
The Big Buy: Examples Of Big Companies That Acquired Small Companies
- Microsoft acquiring LinkedIn
- Elon Musk acquiring Twitter
- Disney acquiring 21st Century Fox
- Facebook acquiring Instagram and WhatsApp
- Amazon acquiring Whole Foods Market
- Sun pharmaceuticals acquiring Ranbaxy Laboratories Ltd
CONCLUSION
In a few words, business acquisitions over the years have presented immense benefits to the buyers even as they are not without troubles.
The risks associated with these acquisitions will be discussed in a future article, but the reasons behind these mergers and acquisitions have been extensively discussed in this article to provide a guide to business owners and startups alike.
Would you like to own your own business someday? Why not start with a business plan today?
