Acquiring a start-up is becoming a popular way for large corporations to modernize internal practices, bring in technology and connect with younger customers. Integrating a start-up into a large conglomerate, however, needs to be done with care to deliver results. Corporate history is littered with examples of large corporates acquiring fast-growing start-ups, only to see them struggle post-acquisition because of misunderstandings, unrealistic expectations and cultural incompatibility.
To understand how large companies can effectively integrate fast-growing but culturally different start-ups, Mergermarket on behalf of Toppan Merrill spoke with three experts for their insights.
Toppan Merrill question: Traditionally, acquisitions of startups and young companies have been most common in the tech industry. Do you think we will see more activity of this kind in other sectors going forward? If so, in which sectors do you think deals are most likely to happen and why? Leading industry experts weigh in...
Arnaud Leroi, Partner, Bain & Company says: What has been happening in the pharmaceutical industry is a good illustration of this dynamic. Pharmaceuticals companies still do a lot of their own R&D but have been very good at acquiring smaller life sciences businesses. These smaller companies have been able to develop compounds at a faster pace and the big pharma companies have acknowledged this and turned to M&A to buy in this R&D.
We are also seeing a lot in the retail industry, with retailers investing in smaller digital companies. Business-to business and healthcare groups are doing the same. Technology is changing the way all companies engage with clients and deliver services, and it is faster to buy in this expertise than build it from scratch organically.
Jamie Leigh, Partner, Cooley adds: I totally agree with the point on life sciences. There are always these small deals that happen to take innovative teams or innovative drugs, or early pipeline products. That industry will always keep doing those kinds of deals, in the same way they've always done, because that pipeline of talent and science is so important.
Overall, I would say tech gets a lot of the press, but some of our less sexy industries are probably copying what tech companies are doing without us being attuned to it.
We are seeing patterns in other sectors mirror what happened in tech with the early disruptor companies. We are seeing the most parallels in transportation, health & wellness and commercial retail.
We're seeing a lot of innovators and a lot of entrepreneurs decide that they want to go and apply the same process to something that matters to them. Maybe it's food production and delivery or green and clean beauty. Maybe it's a move away from fast fashion. The tech model is being used in other sectors.
Dawn Belt, Partner, Fenwick & West weighs in: This is definitely going to happen and not just with traditional M&A or joint ventures, but also with the growth of corporate venture capital (CVC). Corporate venture is now a huge industry with US$30 billion deployed in 2017, and some large, well established players like Intel Capital and Comcast Ventures really lead in this space. In some ways, despite its size, it’s flying under the radar. More tech companies will continue to make significant investments.
And I think we will see other sectors using CVC to enter the tech market, alongside more traditional deal activity. These companies may be seeking return on investment, but generally have more strategic reasons for pursuing CVC activities. This is particularly notable in the fintech sector, but we’re seeing companies in the transportation, food and other traditional industries engaging in this activity as well. CVC can be a very effective way to get a foothold in the tech sector and learn more about how technology can enhance their existing businesses.
And, of course, cross-sector acquisition from more traditional sectors into technology will continue to be a big part of the business world. This is particularly true of the consumer sector, for example. We’ve seen Walmart buying Bonobos and Flipkart and there will be more deals like this. Different industries will continue to look at the technology and pick up startups to enhance their businesses.
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