Why Big Companies Buy Small Companies

When it comes to successful mergers and acquisitions examples, Facebook buying Instagram for $1 billion (when Instagram had zero actual revenue, mind you) is certainly one of the biggest deals in the modern age.

At the time, a lot of industry experts thought Mark Zuckerberg had lost his mind. He had pretty much skipped the entire process of M&A due diligence. He didn’t even inform his board of directors about the purchase. He just did it.

Today, Instagram is worth over $100 billion, according to a recent report by MediaKix. Obviously, Zuckerberg knew exactly what he was doing. However, when the news went public that Facebook was planning to buy Instagram, everyone began asking “why?”

Why do big companies buy smaller companies? What exactly is their acquisition strategy? We’ve come up with four reasons that have absolutely nothing to do with profit and loss statements. Here they are.

1. Big companies buy small companies as a way to stay ahead of (or eliminate) their competition.

One of the main reasons Facebook bought Instagram was because Instagram was becoming a threat. Facebook was all about sharing photos and life experiences and suddenly, Instagram was doing it better. Plus, Instagram was designed for mobile. Facebook was not.

Zuckerberg knew the future was in mobile, and rather than try and catch up and build a competitor product to Instagram – or risk another brand like Twitter snatching it up – he simply bought it instead. He literally bought out his competition. And then he turned around and did it again with the acquisition of WhatsApp.

2. Big companies buy small companies in order to gain technological expertise.

Disruption is the new norm. New and exciting startups are changing the landscape for practically every single business industry. Crowdsourcing apps are replacing traditional banking. The sharing economy – from Uber to Airbnb – is upsetting the status quo in the travel and hospitality industry.

Rather than spending millions of dollars and an enormous amount of time to develop the same type of technology these new startups are offering, sometimes it’s just easier for a giant corporation to buy the startup.

Facebook could have developed its own set of “filters” and enhanced its mobile app to compete with Instagram. Of course, that process would have taken a lot more time. Time during which Instagram would have obtained more and more users and another enterprise organization could have been looking at Instagram as part of their business acquisition process.

3. Big companies buy small companies to stay relevant.

Remember MySpace? Facebook became the new MySpace and was worried about Instagram becoming the new Facebook. Once the original Facebook users’ parents started using it, the younger generation began jumping ship over to newer and “cooler” social media platforms like Instagram and Snapchat.

The best way not to lose a younger audience is to follow them to whatever new app or technology they’re gravitating to and, in Facebook’s case, buy it. In doing so, Zuckerberg was able to keep both generations under the same roof and stay relevant to a younger, hipper crowd.

4.  Big companies buy small companies so they can attract the best talent.

In any merger or takeover, one of the acquisition process steps is determining how to incorporate the best and the brightest talent from the startup or smaller company into the larger’s corporate culture.

As part of the deal, Zuckerberg kept co-founder Kevin Systrom as CEO and promised to let him continue to run Instagram on his own terms. Systrom actually went on to hire James Everingham from Yahoo and Kevin Weil from Twitter.

While acquiring Instagram was really about the technology and the passion of the users, Zuckerberg stated in an interview with Vanity Fair that, “Most of the other things we bought were talent acquisitions, but in this case, we wanted to keep it what it was and build that out.”

So not only was Facebook able to gain the talent behind Instagram, the company also has thousands of talented developers around the world that want to work for both.

In conclusion, when it comes to merger and acquisition strategies, just remember that it’s not always about the financials. If you’re thinking about launching a startup and how to sell a company to a giant like Facebook in the future, focus on the product or solution first and the passion that it will inspire in your future users. That’s the real key to a really big deal.