Introduction
The tech industry’s evolution often involves strategically utilising M&A. A glance at successful tech giants shows they have significantly augmented their scale and value through well-engineered M&A deals. However, it’s essential to remember that these strategic levers are not confined to only the industry giants. Small to medium tech companies, too, can unlock transformative growth and create value through carefully planned and executed M&A.
In this Agile Thinking® Insight, we explore the top eight benefits of M&A for tech companies, shedding light on how they can serve as powerful accelerators for growth, irrespective of the company’s size.
1. Economies of Scale
M&A provides software companies with significant opportunities to achieve economies of scale. By combining operations, companies can spread their fixed costs over a larger revenue base, reducing the per-unit cost and enhancing profitability. Through M&A, technology companies can leverage more extensive resources, including talent and infrastructure, to increase production efficiency while maintaining or reducing operational costs.
An example of M&A leading to economies of scale is Microsoft’s acquisition of Skype ($8.5 billion) in 2011 from the private investment group Silver Lake Partners. This acquisition allowed Microsoft to increase its communication services’ user base dramatically. By integrating Skype’s video and voice calling capabilities with Microsoft’s existing platforms, the tech giant was able to spread the costs of infrastructure, development, and support over a much larger number of users. This integration reduced the per-user cost and enhanced the overall profitability for Microsoft, offering a clear demonstration of how M&A can drive economies of scale.
2. Economies of Scope
M&A allows companies to achieve economies of scope by expanding their service offerings, integrating related technologies, or entering new markets. Such expansion can enable firms to utilise shared resources across different products or services, creating efficiencies and cost savings. M&A enables this cross-utilisation of capabilities and resources, enhancing the potential for innovation and growth.
Google’s acquisition of YouTube ($1.65 billion)in 2006 from its original creators, Chad Hurley, Steve Chen, and Jawed Karim,perfectly illustrates how M&A can lead to economies of scope. By combining their capabilities, Google was able to extend its advertising network to YouTube’s video platform, creating efficiencies and providing more integrated services to advertisers and users alike.
3. Synergies
M&A can generate significant synergies, from cost savings to revenue enhancements. By integrating systems, processes, and talent, companies can optimise their operations and unlock latent value in their businesses. Additionally, merging firms can capitalise on each other’s strengths, whether it be advanced technology, strategic partnerships, or unique intellectual property, fostering innovative solutions and accelerating growth.
Significant synergies were realised when Microsoft acquired publicly traded LinkedIn ($26.2 billion) in 2016. Integrating LinkedIn’s professional networking platform with Microsoft’s suite of productivity tools has created opportunities for innovation and cross-platform integration that neither company could have achieved alone.
4. Opportunistic Value Generation
M&A often represents an opportunistic value-generation strategy for tech firms. Acquiring companies can leverage undervalued assets, transform them using their superior capabilities or market position, and create substantial value. This transformation can result from streamlining operations, leveraging innovative technologies, or integrating with an existing suite of services. By enabling such transformations, M&A can generate significant returns on investment.
When Adobe acquired Magento ($1.68 billion) in 2018 from Permira, a private equity firm, it saw an opportunity to incorporate Magento’s e-commerce capabilities into its own suite of digital marketing services. Adobe was able to leverage Magento’s capabilities to deliver a more comprehensive solution to its customers, creating significant value.
5. Market Share
A well-executed M&A strategy can result in an increased market share. By combining customer bases and leveraging cross-selling opportunities, tech companies can expand their reach and influence in the market. M&A allows companies to grow more quickly than traditional organic methods, enabling them to outperform their competitors and potentially command greater market power.
When Amazon acquired publicly tradedWhole Foods ($13.7 billion) in 2017, it instantly gained a significant share in the brick-and-mortar grocery market. By integrating Whole Foods into its broader ecosystem, Amazon has been able to cross-sell its products and services to Whole Foods customers, thereby expanding its market share.
6. Competitive Edge
M&A can offer a crucial competitive edge in the technology sector. It allows companies to acquire strategic assets such as intellectual property, talent, or advanced technology that can set them apart from competitors. Integrating unique capabilities through M&A can expedite product development, enhance service offerings, and position the combined entity as a market leader.
Apple’s acquisition of Siri (est. $200 million) in 2010 from Siri Inc.gave the company a critical edge in the smartphone market by integrating Siri’s advanced voice recognition technology into its iPhone, making it a leader in voice-assisted devices.
7. Diversifying Risk
Diversification is a key benefit of M&A. By merging with or acquiring another company, tech companies can diversify their product offerings, geographical presence, and customer base. This diversity can mitigate risk by reducing dependence on a single market or product line. In an industry known for rapid change and volatility, the risk mitigation provided by diversification through M&A can be a valuable strategic advantage.
When Cisco acquired AppDynamics ($3.7 billion) in 2017, just days before AppDynamics was scheduled to go public, it diversified its product offering. Before the acquisition, Cisco relied heavily on its networking hardware business. The acquisition allowed Cisco to broaden its software offerings and reduce its dependence on hardware, thus reducing business risks.
8. Faster Strategy Implementation
Finally, M&A allows for quicker strategy implementation. For tech companies looking to enter new markets, develop new products, or acquire new capabilities, M&A can be a fast and effective route. Instead of building from scratch, acquiring an established firm provides immediate access to the necessary assets and expertise. This accelerated implementation can translate into a faster return on investment, making M&A a strategic tool for swift growth and development.
When Salesforce acquired publicly tradedSlack ($27.7 billion) in 2020, it aimed to incorporate Slack’s team collaboration capabilities into its CRM platform quickly. This acquisition allowed Salesforce to quickly implement its strategy of offering customers a more integrated and comprehensive solution, speeding up its return on investment.
Conclusion
As shown by the case studies throughout this Agile Thinking® Insight, the transformative power of M&A is clear. It’s important to remember that these benefits aren’t exclusive to tech giants making substantial acquisitions. Small and medium-sized tech firms can also leverage M&A strategically to drive growth, enhance capabilities, or gain a competitive edge. A well-considered and meticulously executed M&A strategy can yield significant benefits, regardless of the company’s size. By carefully identifying the specific advantages they seek from an acquisition, smaller tech firms can utilise M&A as a potent vehicle to reach their strategic objectives, navigate the complex technology landscape, and, ultimately, catalyse their success.