The Curious Case of David(s) buying Goliath(s)

In recent times, the news of Pharmeasy buying Thyrocare, Groww buying India Bulls, BharatPe buying PMC, Byju buying Aakash has been attracting more attention than the acquisition spree of Tatas and Reliance.

Obviously, because usually, it is the Incumbents/Goliath that acquire the challengers/David or David (startups) buying other David (Startups). The unusualness definitely deserves all the attention and the applause! In certain sense, it is the more akin to Amazon buying MGM studios or Amazon buying Whole Foods (though the mode of funding for the acquisition is different, more on it later)

Before we delve more on the unusual aspect, let us talk a little bit about acquisitions.

Most of the acquisitions are conceived in hell and are destined to be a disaster! One of the HBR article says, "According to most?studies, between 70 and 90 percent of acquisitions fail.?" Of course, the definition of success and failure are relative and there are exceptions. [Disney bought Marvel for $4B in 2009 and Avengers Endgame alone grossed $2.8B]

So why do companies still do acquisitions?

Acquisition happens for few reasons. Companies want to enter in to new segment (think Google buying Android) enter in to new geography (think Walmart buying Flipkart) and think it is easy to buy rather than build. Sometimes the competitor is better than your own offering(Think Google buying YouTube). Sometimes, you don't want the competition to become a competition (Think Facebook buying WhatsApp and Instagram) At times, it is a genuine strategy (Think of all Cisco Acquisitions during the dotcom boom),In rare occasions, the acquisition really makes sense (Disney buying Pixar)

Of course, there are other reasons like ego of the CEO, or sitting on a huge cash pile and not knowing what to do and at the behest of the board/activist investor and deadly trio of Management consultants, strategists and investment bankers advise to make acquisitions.

Sometimes people don't want to buy because they think, they are worthless (or have no idea what to do with them) [Think Sony refusing to buy other Marvel characters except Spiderman]

We know, why do people buy(or don't buy). why do people sell(or choose not to sell)? Actually, this is more important than why people buy and one of the critical factor to our unusual topic at hand!

IMO, Money, Money nothing but Money Honey. In a fire sale, one is happy to salvage any value and is glad to sell and make any money. In successful sales, there is a huge premium and it becomes an offer too good to refuse.

In cases, where people chose not to sell (or buyer making a lowball offer), it is primarily because they feel they could create more value than what is being offered. [Think Yahoo-Google, Snap-FB, Blockbuster-Netflix]

Whenever companies buy other companies (be it Goliath buying David or David buying David) they buy paying out right cash, (one of the primary reasons for acquisition being the huge cash pile they are sitting on and not knowing what to do with it) or take debt or pay through equity. Most of times, it is a combination of two or all the three.

Coming back to our curious case of David(s) buying Goliath(s),

IMO

In terms of sellers, at least two of them, felt they were getting a premium and probably thought could not generate more value in the future and decided they are better off with the exit. (riding gloriously in to sunset)

In terms of buyers, they had raised money and believed the money is better deployed by buying some steady and solid assets (rather than focusing on customer acquisition by subsidizing the cost and making loss in every transaction or quickly reaching the marketing spend target by sponsoring the cricket tournaments or pivot in to an ad agency making ads with your childhood idols)

To me, the biggest takeaway is the lines between VC and PE are getting more blurred. May be MaSa San should take a cue, fund an autonomous driving startup or an EV startup with $65B USD and ask them to buy out Ford!

In case you are interested, I have written two other articles in David and Goliath Series "Why Corporates and Startups should work together?" and "How they could work together?"