Apple has been said to buy companies at the same rate people buy groceries. If that seems astonishing, consider how many reasons there are for acquiring a smaller startup: expanding current business, broadening into a new market, increasing performance, integrating new technologies, accessing new capabilities, shutting down potential competitors -- the list goes on and on. 

But buying another business, no matter the size, is still a large step to take for many organizations. If not done properly, it can completely throw off the equilibrium of a company: in a worst-case scenario, a failed acquisition can critically damage the larger company’s financial health. This is especially true where the acquisition of new technology looks to fundamentally change the way that a larger company operates. 

But if leaders can discern the right time for acquiring, they’ll be able to reap extraordinary benefits. In the case of Apple, their previous successes have afforded them a massive amount of buying power, and as such, they now acquire any technology or development team that they deem necessary to take their business to the next level. 

Are you ready to acquire a tech startup? There are several signals that can help cut through the uncertainty and frame a potential acquisition as either a good or a bad idea. 

Your Business is Already Doing Well

The general consensus for M&A is that businesses shouldn’t necessarily acquire a startup or smaller business in the hopes that it will save the company or re-position it as a new leader in its field. Take for instance the example of Yahoo’s acquisition of social media site Tumblr: then CEO Marissa Mayer expressed hope for the acquisition to help save their declining platform, which was becoming increasingly threatened to get bought out itself. Yahoo predicted that Tumblr would increase their audience by 50 percent, but after setting unrealistic sales target goals and a resulting employee exodus, they were forced to roll back their integration and cut their losses, setting them back even further than before.

Being in such a situation is really a sign that something within the business strategy must be adjusted, which is something acquisitions won’t be able to solve on their own. The most effective way to utilize acquisitions is to build upon the success you already have, and to continue your upward momentum. Instead of leaders asking themselves, “How can this acquisition make us successful?” they should aim to ask, “How can this acquisition help build upon our success?” This distinction makes all the difference. Even if the startup that is being acquired exists in a different market, leaders must view their acquisition as an avenue for continuing to expand and grow their capabilities, rather than just as a shortcut or a quick speed boost. 

Other positive signs include financial stability, which is a great achievement for any business, and the presence of strong leadership teams and talented employees. In addition, if the business is consistently reaching or even exceeding its set goals, that is an indicator that it might be time for the business to further expand its scope.

There is a Clear Vision for How You Would Use Their Technology

Acquisitions are risky endeavors that require careful planning. Businesses that attempt to quickly catch on to new trends or attempt to jump into a new market can often fall prey to a lack of planning. In 2012, Zynga, a company that makes popular social media games, bought mobile gaming company OMGPOP, whose game had become a viral hit. But without a plan for acquisition, Zynga merely ended up shutting down the smaller company only a year after purchasing it.

Larger businesses often seek to acquire smaller startups expressly for the technology or products that they are pioneering. These products and technological properties are extremely valuable prospects to have, but that doesn’t mean a business should try and snap up just any old startup whose newly developed tech is bearing fruit. An acquiring company ought to have a clear vision and strategy for how they will effectively incorporate the acquired company’s technology into their existing business plan.

Take for instance the massive success of Facebook’s acquisition of Instagram. While choosing to keep Instagram as a separate social media brand, Facebook thoroughly planned and applied its own advertising and monetization strategies, which provided a greater level of synergy between the two platforms. Today, Instagram is one of the largest social media brands in the world, alongside Facebook. Facebook’s clear vision for how it could utilize Instagram and help it grow were instrumental in the success of this acquisition.

While there may be something to be said about “killer acquisitions” where larger businesses attempt to shut down a competitor, the likelihood of that happening is relatively low. It’s far more beneficial to try and incorporate a competitor’s tools into one’s own business. Healthy competition is what drives innovation, meaning that “killer acquisitions” are often more unproductive than not.

The Startup Has Employees and Management that are Valuable to Your Own Team

Within tech startups and smaller companies, the upper management, as well as any and all development teams, can prove vital to keep on board as you plan to acquire their business. They are the ones who are the most familiar with the technology at hand, seeing as they were likely the ones who helped build it from the ground up. Even if the startup is being absorbed into your own company, keeping the teams who have proven themselves capable of creating the business you’re acquiring is often a valuable measure. 

This means that when planning an acquisition, it’s a good idea to proactively identify how new employees will fit into the existing structure of the larger company. In particular, the difference in work culture can be a shock, which is why helping the transition through an effective integration process with set goals and objectives is essential for getting everyone adjusted and hitting the ground running. In many cases, acquired startups are able to continue operating with little changes to their structure, but when employees and teams are absorbed into the acquiring company, planning for that event makes all the difference in making sure that employees stay motivated and productive.

The allure of snatching up innovative technology and talented teams to throttle ahead of the competition is certainly an appealing notion to many a business leader. But identifying that perfect moment for an acquisition is part art and part science. To truly find success when acquiring a startup, having a well-thought out and thorough strategy can help minimize the risks of business acquisitions and allow the acquiring company to grow in a meaningful way. 

About the Author(s)

 Robert  Koven

Robert Koven is the Managing Director of Leonis Partners, one of New York City’s top financial firms with a focus on Mergers & Acquisitions and equity capital transactions. After working for investment banks like JPMorgan and Lazard Freres, Robert Koven and his team at Leonis took techniques they learned at those large financial institutions and applied them to growing...

Managing Director, Leonis Partners
How Do Businesses Know When to Acquire a Tech Startup?