Why billion dollar companies acquire tiny million dollar companies … every day.

Over the last six months we have sold two small startups (sub $10mm deals) to large companies which are valued at over $1 billion each. The point of this article is to discuss a common M&A myth that very large companies don’t acquire very small companies. Some people believe that since a $5 million private company acquisition will simply not “move the needle” for a billion dollar company because adding $1-5 million in annual revenue is less than ½ of 1% of total revenue of the buying company … they won’t do it.

Billion dollar companies don’t make tiny million dollar acquisitions 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 because the actual company acquisition wasn’t the strategy, only a part of it.

One way to look at the logic of a small private company acquisition is … every billion dollar corporation has sales people right? … and every time a sales person makes an individual sale that sale doesn’t “move the needle”, yet it makes perfect sense for each sales person 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 1,000 SMB customers with each deal … even if each acquisition accounts for less than 1% of total revenue for the buying corporation.

There are many other reasons small 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.

• To do an “Acqui-Hire”. For example, to acquire a small cohesive development and engineering team as opposed to attempting to hire them one by one.

• To continually train and give experience to the company’s merger and acquisition team members: including managers from the legal, accounting, operational, sales/marketing and technical departments.

• Maybe 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, and it is 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.