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Mergers and acquisitions used to be fairly straightforward in the yesteryears. This is because companies would only make acquisitions within their own industry. This meant that if a technology-based startup were up for grabs, the list of potential suitors would only include companies like Google and Microsoft. This has completely changed now.
Traditional companies like General Electric and Wal-Mart have made several technology-based acquisitions. This has come as a surprise to many people given that these firms do not have the competence required to manage a tech firm. However, the trend is clear.
In fact, in the year 2017, more non-tech firms acquired tech-based startups than the usual big tech firms buying small firms.
In this article, we will have a closer look at some of the reasons behind this increase in inter-industry acquisitions.
Even industrial age companies need to have a digital footprint. This is where the acquisitions come in handy. Large companies like Wal-Mart buy small online retailers who have developed some specific technology. This technology can then be leveraged by Wal-Mart to increase its online presence by leaps and bounds. This is the reason why many technology-based startups in industries such as Fintech and e-commerce are more valuable to traditional companies and banks than they are to other tech companies. Since they are more valuable and provide synergy to the overall business model, industrial age companies are willing to pay more. This is the reason behind the increase in the number of inter-industry acquisitions. To the untrained observer, they might appear to be unrelated. However, the fact of the matter is that such acquisitions provide synergy and create value.
However, many have found out that it can be very time consuming as well as counterproductive. This is the reason why acquisitions make sense. Acquisitions allow companies to leapfrog ahead of the competition. When General Electric buys a technology startup, they drastically reduce their chances of being made redundant by them.
If a company finds a start-up which has created a product which they need to use extensively, many times they may be better off just buying off the company rather than paying annual subscriptions. Not only does this strategy lower costs but also improves the profitability of the company by allowing it to generate additional revenue sources.
These companies have thousands of users. As such, the start-up finds a fixed user base. Also, these companies may refer the startup to other sister companies. As such, the startup gains because of the number of clients as well as the resources allocated to the product increase exponentially.
The problem is that when industrial age companies acquire tech startups, they convert it into a bureaucracy. The number of people involved in decision making is very large. Many people are consulted before a decision is taken. This takes away the speed which is essential for the success of a startup. The workaround is to let the start-up work as an independent company under the aegis of the larger company.
If there is too much focus on profitability early on, then it is likely that the start-up will not survive very long. Industrial and digital business models are fundamentally different. This is the reason why policies which are considered to be prudent in an industrial company ends up wreaking havoc in a digital firm.
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