Acquisition Strategy - The Logic of hefty Premiums
We all are pretty intrigued when we read/hear about one startup acquiring another or the potential unicorn being acquired by Google or Facebook.
The prices are so startling that we need to read those news again in order to believe it and accept it! Later on, when we often fail to find the logic and discuss the exorbitant high price paid for it, we discard our theories term these deals as bubble.
Some of the reasons for these high price are:
1. Acquiring the potential Competitor to increase market share and hence have more influence on the market by size. Flipkart used this strategy to counter Amazon India by acquiring Myntra and eliminating it as a competitor thereby focusing entirely on rival Amazon India and went on to become India's largest online market place!
2. Acquiring to synergise the potential substitute and use the data analytics to create more targeted business model. Facebook acquired Whats App by a whooping $19 billion! Where did it go? To the premium sponsored targeted advertisements that crop up in your news feed after every 5-8 updates.
3. Acquiring the knowhow that is patented so as to create a niche product/service. The best example is Google acquiring Motorola and getting all the underlying patents transferred in its name only to resell the brand without patents to Lenovo. A strategic investment well executed and synergies to add value to its mobile OS division Android.
4. Using the acquisition to save the market share by buying an established brand with technical knowhow. We all may recall how Ratan Tata backed Tata Motors acquired Corus in 2008 that was the most talked about deal in the market and understood by very few. Tata Motors wanted to avoid a potential takeover by newly formed Arcelor Mittal and its Indian entry which had a very significant market share in the world Steel Industry. A premium well spent.
5. A classic acquisition can help the organisation augment its basic product/service and integrate it with acquired product/service/technology. Google acquires Picasa, YouTube, Drive, etc. to augment its Gmail by integrating it with the acquired services/technology for better user experience and increase market share.
6. Acquisition can be used to leverage the overall value of the organisation while raising further rounds of funding. For example, Inshorts acquires a small data analytics startup firm for $4 million and created the synergy affect to increase the quantum of fund required for next round of funding without forgoing any stake in the company with respect to original deal.
7. Sometimes, these strategies can help deal with possible hostile acquisition bid to thwart a potential takeover. Apple, while re-introducing Steve Jobs acquired his venture NEXT to thwart the advances from Bill gates led Microsoft which went on to become the most valuable company in the world until Alphabet took over that spot recently!
Every strategy is unique on its own. The factors that affect the acquisition strategy varies from each case based on quantum of fund, purpose, geography & numerous other variable causes. However, the basic idea is often not revealed and we just make out whatever we are available to understand in an equilibrium market.
If you know a strategy that is not covered here, please do let us know in comments.