Internet M&A: Why Billion-Dollar Tech Businesses Acquire Tiny Million-Dollar Companies Everyday

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Eric FurlowAuthor: Eric Furlow, assisting CEOs and individual investors acquire, divest and value Internet service companies since 1996.

There’s a common myth that very large companies don’t acquire very small companies. This is simply not true. I have recently sold two small private Internet service companies (sub $5mm deals) to publicly traded companies which are valued at over $2 billion each.

Some people believe that a $3 million private company acquisition will simply not “move the needle” for a billion-dollar company. Adding $1-5 million in annual revenue would be less than ½ of 1% of total revenue of the buying company. For a multi-billion company this doesn’t make any sense, right?

Well, billion-dollar public companies don’t make tiny ‘million-dollar’ acquisitions and then put out a news release expecting a positive reaction from the stock market. The truth is, knowledge of these tiny acquisitions is rarely made public. The actual company acquisition in many cases is not the strategy rather only a part of it.

One way to look at the logic of a small private company acquisition is as follows. Every billion-dollar corporation has salespeople, right? And every time a salesperson makes an individual sale, that sale doesn’t “move the needle,” yet it makes perfect sense for each salesperson to pursue individual customer sales. So, in many cases it’s quite logical for a small team of managers to pursue strategic acquisitions and acquire a relatively small number of SMB customers with each deal, … even when each acquisition accounts for less than 1% of total revenue for the buying corporation.

There are many other reasons why ‘tiny private company’ acquisitions make sense yet “don’t move the needle” such as:

  • Faster entry into a new geographic market
  • To acquire a new product or service offering, as opposed to developing it in-house
  • To test cross-selling different products into the acquired customer base, or sell the acquired company’s products/services back into the corporation’s customer base
  • Acquire a company’s IP (Intellectual Property)
  • Remove a competitor from a specific market
  • Vertical integration
  • To do an ‘Acqui-Hire.’ For example, to acquire a small cohesive development/engineering team as opposed to attempting to hire them one by one
  • To continually train and give experience to the company’s M&A team members: including managers from the legal, accounting, operational, sales/marketing and technical departments.
  • To practice a certain M&A strategy on a tiny deal in preparation for an upcoming much larger company acquisition where the cost of mistakes would be far greater.
  • To acquire a government issued permit or license which a target company owns. It might be cheaper and faster to acquire this company as opposed to going through the approval process. Or, there is an exclusive allocation issue where the target company acquisition is the only way to acquire the permit or license.

As a Merger & Acquisition consultant, I have been focusing on private company M&A in the Internet space for over 20 years now. During these years, I have learned that communicating a company acquisition opportunity to the CEO of a large public company versus the CEO of a small private company differ a lot. The methods and processes are completely different. But it helps when you know “what moves the needle” for the CEOs and companies involved, large and small.

About Furlow Consulting

Eric Furlow has been assisting CEOs and individual investors acquire, divest, and value Internet service companies since 1996 in the following industries: web/cloud hosting, MSPs, VARs, IaaS, digital agencies, and the 1001 flavors of SaaS. As a consultant Eric has helped clients from over 30 countries around the world. Have a look at his references: www.furlowconsulting.com/testimonials.

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