Have you ever wondered why bigger companies buy smaller ones? For example, Google buys a company every 2 weeks!
16Best shows us exactly who owns who in the world of the web. If you take a closer look, it becomes clear that some of the most well-known companies on the web are actually owned by the larger ones.
Img Source : 16best
Some of the Google’s companies include HTC, Blogger, Waze, YouTube, DeepMind, FireBase and many others. Microsoft owns Linked Expedia In, Bing, MSN, Skype, Lumia and Xbox to name a few. Long time now is the biggest player for online bookings and travels, thanks to numerous acquisitions.
Taking a look at this maze of ownership shows how closely the majority of the large companies are all intertwined.
So why is this the case? Why do larger companies buy smaller ones?
When a larger company buys a smaller one, the growth can be huge. Buying smaller companies limits the risk attached with the investment, yet they do offer the potential of significant growth. Initially, the larger company benefits from any existing sales and profits that the smaller company already has. Additionally, there is usually an increase in revenue after the deal has been closed.
The resources of the buyer can be used to aid the recent acquisition in terms of customer relationships, established sales processes and improved buying power. All of these tools can be used to aid the financial position of the newly acquired business.
Acquiring multiple small businesses can help to largely increase the sales of the mother company as a whole. This technique can sometimes work better than the larger company trying to improve their own sales individually.
2. Low Risk
Purchasing another company always comes with a risk. There is no guarantee that the new business is going to be successful, there is always the chance that something could go very wrong. One bad acquisition has the potential to destroy a company.
A method to mitigate these risks is to make sure that the acquired business is a small one. The risk is limited here as the financial impact of the purchaser will be minor if things go wrong. Buying multiple smaller companies will help to spread the chance of a bad deal. If one goes wrong, then there are always multiple others to fall back on.
This strategy is often referred to as a ‘roll up’. Such approach presents a very attractive opportunity for large companies, often leading to the investors growing aggressively.
Another major reason for the acquisition of smaller companies is the talent that these companies may bring. This strategy can be cheaper and more convenient for the big guys than trying to build a team from scratch.
If the acquired company is similar to the original one in nature, then the employees are likely to also have a similar skillset. This reduces the effort of having to try and employ a whole new set of staff.
Talent can be a rare commodity to come across, and it is the people that make a company work successfully.
4. Expanding Product Line
Sometimes a business wants to add an additional feature or product to their line. If a smaller company is already supplying what it is they are looking for, then it might be cheaper and easier for them to buy the business as a whole rather than having to start completely from scratch.
Smaller firms may have developed some great technology that larger firms could be interested in. Rather than buying this technology, it is sometimes better to buy the whole company.
This way, those making the purchase not only has hold of the technology, but also any future technological breakthroughs and profits that the acquired business presents.
Elimination of Competitors
Another major reason for this purchasing trend is simply the fact that by buying other companies, they are eliminating direct competition. There is a very high chance that in the years to come a smaller company will grow into a business giant, so why not stop that risk before it is even an option. It is better for market leader to have the smaller companies on their side from the start than risking being overshadowed by them.