Why Big Companies Destroy Small Ones In M&A

Ever wonder why big companies destroy small ones in M&A? We see it all the time, and we are here to investigate the reasoning behind this occurrence. Was it not a good fit? Was it a bad integration? Or was it because big companies should never touch small businesses in the first place? 

Joining us to talk about this problem is Carlos Cesta, Vice President of Corporate Development at Presidio, and Jeff Desroches, Vice President of Corporate Development at Atlas Copco.

“The worst thing is not to discuss (integration) at all. You’re setting yourself up for failure.” - Carlos Cesta.

Reason for buying

So why do big companies buy small ones in the first place? One of the biggest reasons is that they couldn’t organically develop the small company’s technology and have decided that they needed full control of the asset. There are also cases where buying a company is more efficient to achieve business goals than developing the technology in house. 

Another reason why these acquisitions happen is that there is less risk for the big company. They’re not betting a lot by building something that they don’t know anything about, and they will just be acquiring something that is already proven to work. 

How it gets destroyed

So how does the small company unintentionally get destroyed in the process?  The most common issues that you will see are caused by bureaucracy layering. The decision-making and the big companies’ approval process can take much longer, and it is there for a reason. That doesn’t necessarily make sense for small companies. Once you apply those processes into the smaller company, you are now inadvertently introducing inefficiencies. 

Entrepreneurs could also be a problem. Aside from serial entrepreneurs, of course, most of the time, this will be their only exposure to this type of process. They are used to being the company’s primary decision-maker, and now they have to get multiple levels of approval before they can get anything done. The entire process can be emotional for them, and you need to show empathy.

What you can do

Both of these risks can be mitigated by a clear communication plan. Very early in the process, you need to be very upfront and clear about their role post-deal. Setting expectations incorrectly as to how they’re going to fit into the organization can lead to issues afterward.

The acquiring company also has to acknowledge the fact that they bought the small company for a reason. They are the experts in their market field, and should have a voice in the matter. They know more about their industry, market, products, and customers, so coming up with a joint integration plan for both companies to be aligned and comfortable is crucial for deal success.

Lastly, the best thing you can do to integrate effectively is to bring the integration team into the diligence process. This will help the acquiring company to identify integration risks early on in the process, and come up with a solid integration plan to mitigate those risks.

Conclusion

The huge difference in culture ultimately destroys small companies when they get acquired by a larger company. However, if you can mitigate all those cultural differences and integrate properly, both parties can benefit from the acquisition.


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