Why companies make acquisitions

Acquisitions are quite popular in the corporate world. A bigger company buys out or takes over the smaller company—a classic case of big fish swallowing small fry.

So why do acquisitions happen? A company is not likely to acquire another company just for the heck of it. Takeovers happen for several reasons.

Some of these reasons include:

To boost profitability

Companies coming together is an excellent opportunity to cut costs. Both companies can effectively re-align resources and maximise profits. Android went from a relatively unknown software to the most used mobile operating system in the world after Alphabet’s acquisition in 2005. Analysts have estimated that the revenue of Alphabet Inc without Android would probably be lower by $11.3bn

As a way to enter a foreign market

Buying an existing company is an easy way of expanding operations in a new country or region. The acquisition allows leveraging on the preexisting network, human resources and customer base of the acquired company. The recent acquisition of Paystack by Stripe provided a way for stripe to enter the African market. Stripe announced its plan to expand into more geographies raising $600 million in funding. The Silicon Valley company in October announced the acquisition of Nigeria’s Paystack. A strategic move to establish Stripe’s presence in Africa.

To learn

Yes, reading books and taking courses is not the only way to learn. Some companies merge and acquire others to study their business and growth model. An example is Walmart. Walmart acquired Bonobos, an online clothing company and appointed Bonobos founder Andy Dunn to lead Walmart’s effort in sales of its online consumer brands. Today, Walmart is using all that learned experience to put a hearty fight against Amazon. Walmart has also purchased over 15 digital companies in the last decade.

As great as acquisitions sound, not all acquisitions have a happy ending.

Here are some reasons why some acquisitions fail

Culture difference

A difference in company culture can make or mar an acquisition. One example that comes to mind is Google’s $3.2 billion acquisition of Nest. On paper, the deal made sense. Nest made great “smart home” devices, and Google could leverage its AI and machine learning expertise to make them even better. Just one small problem- the company cultures were completely different.

Nest was founded by ex-Apple employees and had a secretive, reserved culture where people didn’t talk or socialise much. Google, in reverse, encourages its employees to talk about everything and wants them to socialise as much as possible. Inevitably, managers at both companies had trouble seeing eye-to-eye.

It is worth noting that cultural mismatches can still work if the acquired company retains a high level of independence.

Failure to do due diligence

An acquired company can turn out to be less profitable than expected, just like Yahoo’s acquisition of Tumblr. Yahoo bought Tumblr for $1billion in 2014 and ended up selling the blogging site for $3Million three years later.

Constriction of growth after acquiring

Think of  MySpace’s $250 million acquisition of Photobucket. In theory, the deal looked like a well thought out one. Tons of Photobucket users uploaded images to blogs and social networks like MySpace. After the acquisition, Photobucket grew steadily at first, but MySpace ownership eventually constrained its growth and made it harder to partner with other sites. MySpace ended up selling the company two years later for $60 million. Oops!

As much as acquisitions are useful for improving status and reach, there is one rule that must never be neglected, and that is to “Look before you leap”.