M&A: Buying other companies

As your valuation increases, your stock may suddenly become a valuable currency with which to buy other companies. Many first-time CEOs or executive teams tend to shy away from acquisitions due to a lack of familiarity. If done right acquisitions can accelerate a company’s product and hiring plan, as well as enable key strategic or defensive moves against competitors.

When I was at Twitter, the M&A team reported to me. I saw firsthand both the value of M&A as a strategic tool as well as the sheer number of startups that flounder and are looking for an acquirer (the failed startups no one ever talks about). While at Google, I was involved with the diligence, integration, or post-merger product management of a number of companies including Android (which became the well-known handset platform), Google Mobile Maps (originally a company called ZipDash), and the first Gmail client application (originally a company called Reqwireless).

M&A was a powerful tool for both Google and Twitter to add new products and key people as well as make major strategic moves. Similarly, Facebook has stayed at the leading edge (and acquired major market share) via its acquisitions of companies such as WhatsApp and Instagram, but also less famous companies like Snaptu, which drove major adoption of Facebook as a mobile client to over a hundred million people in the low- and middle-income world.

Most companies wait too long before making their first acquisition or are hesitant to use their stock as currency. Hopefully the information in this section will spark your M&A interest—and facilitate your ability to buy companies—early, rather than late, in your startup’s growth.

When should you start to buy other companies?

Each CEO and board needs to decide when the time is right. Strategic acquisitions may be necessary early in a company’s life. For example, when Twitter acquired Summize (which became Twitter Search), Twitter was just about 15 people in size and worth only around $100 million itself.

By the time a given company is worth $1 billion or more, the CEO and board should start to think of M&A as a serious tool for accelerating the company’s progress and valuation. For example, at $1 billion market cap, a $10 million acquisition is just 1% of your startup’s equity. If the acquisition can increase your valuation by just 10%, then it is clearly ROI positive. By the time your company is worth $5 billion to $10 billion or more, M&A can become a central part of your overall company strategy.

For revenue-generating companies, the potential value of an acquisition may be directly quantifiable. For example, when Twitter M&A worked for me, it was easier to assess the potential value of advertising-related acquisitions because of the direct revenue impact they would have. If Twitter could generate, say, $50 million more revenue than it had a year earlier, the potential dollar value of the acquisition was clear and therefore the range of prices we were willing to pay became a simple math problem.

You can also translate revenue + margin into potential market cap. If your valuation (or your public market comparable) is at 10X earnings, then an extra $10 million in margin may equate to another $100 million in market cap for your own company. This sort of math allows the M&A team to present ROI-based arguments around ad-tech related acquisitions, and allows you to start prioritizing the purchases you want to make on the product side.