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It’s Cheaper to Buy Another Company

By: Steve Johnson

2/27/2008 - 37 Comments

Have you ever wondered why companies buy other companies? The reason is that it's the cheapest way to gain new customers.

New customers are the driving force behind company acquisitions.  In competitive markets, throwing more money at marketing and sales, just doesn’t bring in customers fast enough to hit growth targets.

The acquisition strategy is a fast-track for gaining customers and growing a business.  It’s not, however, without risk, particularly when it comes to successfully integrating the two organizations and migrating the customer base into the new company without losing any customers in the process.

The high profile acquisition of Yahoo by Microsoft is all about extending Microsoft’s customer base in a very competitive market.  At this point, it is next to impossible for Microsoft to grow its Internet market without buying the loyal customers of a competitor. 

Buying up the competitors is also a strategic to increase profits by increasing prices. Fewer competitors allow the industry leaders to increase prices, resulting in higher profits.  So, just by buying Yahoo, Microsoft will be able to increase its prices on its own products.

Lots of Money

Acquisitions take money, and lots of it, which is why low interest rates usually trigger a stampede of acquisitions.  If your company is planning to grow with acquisitions, now is a good time, because you can borrow money at 7-8 percent.  This is historically low and will most likely be higher as the economy slips into a recession, and inflation becomes a problem.  Higher interest rates make it a lot harder for businesses to justify long-term loans. 

The Startup

Most of the time, it is nearly impossible for a startup to directly compete in an existing market, because the competing businesses have far too much leverage over a startup. That’s why new businesses attack new markets. New markets have few competitors but they also have few customers, which leads to a business model heavily focused on direct customer relationship building. The entire staff of a startup is usually focused on direct sales for the first few years, focusing on converting non-consumers into new customers. 

After a startup creates a large enough customers base to produce a profitable revenue stream, they are a prime target for a larger business to acquire.  The hard work of building a customer base has been done.  Building a customer base is one of the hardest tasks in business, which is why successful startups are paid very well when acquired.

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