Why do companies acquire other companies?

There are many reasons to acquire another company, as noted by all the posters. Fundamentally it's because technology alone isn't enough.

Some reasons are to:

• Acquire key technology (source code, infrastructure, etc.)
• Acquire key people or a critical team of people (ie. sum greater than the parts) 
• Acquire intellectual property (patents etc.)
• Diffuse an IP lawsuit (by buying-out the litigant) 
• Combat first-mover advantage
• Reduce time to market
• Acquire users
• Enter into another market 
• Expand market share above a critical point (>60% for a 2-horse race) 
• Directly stop a compeitor (ie. acquire, dismantle & mothball) 
• Acquire a brand 
• Acquire a company culture, business process or operations system that can't be quickly copied (ie. startup within a larger company).

This dovetails nicely with the meme of idea-vs-execution in the startup world: acquiring a company is akin to acquiring their execution (the critical part) versus copying just the idea.

I'm sure I've missed some reasons - add them in the comments!  

M&A (mergers and acquisitions) is a huge topic in business, and there are lost of books and academic courses that explain the logic behind it. I will name a few of the reasons, but I encourage you to read more if you are interested in the subject.

There is a lot of potential value in companies, in many different aspects of the company. Having brand recognition and a large loyal customer base is worth a lot.

Can anyone write the code that does what twitter does? Sure, but does anyone else have the user base they have?

In some cases, paying for the technology makes more sense then developing it in house due to either legal constraints, such as patents, and in other case its worth it to save the time

There are many reasons for low-tech companies to go though an M&A as well. In some cases, buying another company can lead to savings... If both companies develop or manufacture a similar product, then unifying some of the resources (headquarters, factories, departments) can lead to savings that are worth more then the original company, and it could also lead to increased market share.

Some industries have a high barrier to entry, which leads to consolidation. One example is the beer market in the U.S., where it is important to spend a lot of money on advertising and distribution, which leads to fewer and fewer players making more and more money (which is not the case in Europe, where it is legal for a beer company to own a pub. and so the choice is not left up to the consumer to which beer to buy according the which company has the best advertising).

As you can see, there are lots and lots of reasons, which vary from industry to industry. Feel free to ask followup questions, or to read more about it online.

Buying a competitor is a good strategy to kill the competition. Google buying Youtube (Google Video competitor), Microsoft's deal with Yahoo (Bing competitor), Intuit buying Mint (Quickbooks competitor), there are tons of other examples like these ones. Buy your competitor(s), so you can control the prices, innovation and user base.

I recently acquired my main competitor. There was a lot of overlap on the technology side, but I wasn't interested in their technology at all. It just made sense for me to acquire them from a strategic point of view.

My main reasons for the acquisition:

• Their user base. Although most were free users, they had a pretty large user base, some Twitter followers, and a good sized email list. This enabled me to get a head start in these areas since my own product hadn't launched yet (was in beta).

• They had an aged PR4 site. Having a newer PR1 site, this certainly helps me out.

• I could benefit from all of their marketing efforts (writeups, backlinks, etc.)

• I inherited all of their market research, user feedback, and application usage statistics. While I have to be careful in how I interpret this information, it's extremely useful to have.

• They had fantastic design which I could then own. This may sound trivial/silly but aesthetics goes a long way when the market is designers. Also, there were a few modules of their app that were great and I can now integrate into my own app (not many).

It didn't hurt that I was able to acquire them for a very cheap price, plus I was able to take a competitor out of the picture.

Understanding the psychology of business always comes down to the consideration of two things- time and money.

Both are precious, finite and interchangeable. In business (as in life), there never seems enough of either.

But we most choose between them. So most corporations.

Technology giants often have money to burn, but the breakneck speed at which technology evolves assures that even the largest, richest and most powerful company cannot afford to waste time- if it does, it will not remain large, rich or powerful for very long. Ask AOL.

The great thing about all manner of financial machinations is that they are always so predictable- whatever is cheapest (simplest and fastest) will always be done. There are few, if any exceptions to this, the golden rule of capitalism.

Time is the most precious resource of all, and it is the one thing that those who can afford it will always buy. That is what a technology acquisition is- an purchase of time.

Google bought youtube for one reason- they could afford it. That's it. Its as simple as that.

Sure, it cost them 1.7 billion dollars, but that is an excellent price for the rarest commodity in existence.

Now Google doesn't have to spend enormous amounts of time and money developing, testing, patenting and marketing a rival technology to attempt to compete with a well-known giant that completely dominates a major technology market. The acquisition of youtube virtually eliminates the need for these resources, not to mention the significant risks of mobilizing them. Success is by no means a sure thing. But an acquisition is, or at least is the closest thing to it.

1.7 billion dollars is a lot of money. But perhaps not that much to Google, which, as I have already said, has money to burn.

The relatively affordable, low-risk acquisition of a major new market powerhouse assures that, sometime in the future, Google will be able to burn even more.

And isn't having enough money to burn what we all want anyway?

Hmm, if they could, they would. They can't, so they buy it.

There are TONS of reasons: Lack of capability, lack of capacity, different internal structure/culture, time to market, existing customer base, and the list goes on for miles.

If you are an old company that missed the boat on a new technology that will put you out of business, you need to acquire a new company that has the technology (and maybe the customers) that you need.

Many companies have done this over the centuries.

owo, no pundits has said it yet? here u go ... m&a happens majorly 'cause your vcs need exit to satisfy their lp, and happens to be playing golf with exec at the acquiring company. you think mint got acquired just because it had the tech & user base, who're u kidding? find out who invested in mint and founder's connections, and then track their investor's fund size and exit trend .. you'll get ur answer.

Or if you can get Accel to invest in you ... "This is a big win for the company’s early investors, which include Sequoia Capital and Accel Partners (this is a huge day for Accel — they were also investors in Playfish, which was just acquired by EA). More recent investors include DFJ and Northgate Capital." Still wondering what gets you acquired ...?

Bear in mind that when a company is acquired, its customer base goes with it. Acquisitions are a great way for larger companies to eat up market share fast!

Need to grow your customers base by 10% this year? Have some money to spend? Then find a competitor that has a good customer base, that is willing to sell, and that you would like to see out of the way and ... bingo! You just got 1000 more customers in a go, one competitor less to worry about, and a lot of publicity in the media. Then you can trash their product... you didn't want it anyway and you have invested so much in building yours that you might as well keep it.

:)

Because it is cheaper and a lot faster than building a competitive similar product, market it, brand it, grow a user base, etc... plus they also get employees (without the long and difficult task of hiring) that will continue with product development, maintenance and support without too much trouble - IMO.

From a purely economical point of view - apart from acquiring their user base - they also acquire the team that has made the product successful. AOL acquired TechCrunch and said they didn't want to lose whatever makes TechCrunch successful.

Plus, the acquired company's people already know each other which saves some money on team building.