Most Common Types of Acquisitions in Tech

Acquisitions define how the tech sector develops. They shape market dynamics and tech trends – from AI to social media – and distort the balance of power in the global tech landscape. Comprehending the different forms of acquisitions and the motivations behind them is critical to evaluating their impact—not just on shareholders and management, but on customers, employees, and society at large.

Acquisitions:

The most common distinction between common types of acquisitions is that there are:

• Horizontal acquisitions. We are talking about entities that, in the production chain, are on the same level (e.g. one producer buys the competitor-producer)
• Vertical acquisitions. We are talking about entities that, in the production chain, are below/above the other’s level (e.g. Instagram buying a startup making face masks).
• Conglomerate acquisition. We are talking about entities in different industries.

There are different reasons for acquisitions:

Efficiency:

• The idea is that an efficient company buys an inefficient company, improves it, and makes it go up in value. If the acquirer fails, the target’s value goes down.
• It’s important that inefficiency is observable to find the inefficient targets

Diversification:

• Buying companies in different industries can allow the acquirer to have some companies to get loans easier, at lower interest rates, while other companies might get fewer loans at higher rates = risk diversification.
• Diversification is costly for companies (layers, investment bankers, consultants, premium, etc.) Shareholders had to bear these costs because management wanted to lower their risk.
  • The market realized this, and the following happened => instead of the management being better than experts in their respective industries when management acquired companies in these industries, the opposite happened. The acquirer (holding company) of the different targets (e.g. one in textile, one in fast food, etc.) acted like a mini capital market. Acquisitions would be engaged in to break up conglomerates and to make profit. The break-up acquisitions got rid of many of the big conglomerates instead of acquisitions creating/growing them.

Agency:

• Some acquisitions can be the source instead of the solution to agency problems
  • Sometimes the acquisition is inefficient because e.g. the acquirer overpays

Market power:

• Market power is about creating monopolies or oligopolies, with the ability to expropriate the consumers.
• Competitive market = whoever is willing to pay more than the product cost in production, gets the product. Part of the surplus goes to the consumer.
• Monopoly market = the more that is being produced, the more profit is being made because the monopoly is the only one producing the product. They decide the monopoly price, which will be higher than in a competitive market. A part of the surplus will also not go to the consumer but to the monopoly. Then some consumers are willing to pay more than the product costs in production and who still don’t get the product (death weight triangle).
• Companies that are trying to create market power to avoid competition and to fix monopoly prices will engage in acquisitions.

Bankruptcy:

• The idea is that you don’t wait for the bankruptcy proceedings to start, but you acquire the distressed company just before that point in time.
• If you buy the company before bankruptcy, you keep the debt but you avoid competitors

Free cash flow:

• It’s tied to the agency’s problem
• Free cash flow = the company has money and for it to be invested, a return for the company has to be generated (cf. cost of capital = cost of debt/equity)
  • If you can’t make an investment that will generate the required return, you should give the money (cash flow) back to shareholders, OR
  • You can use the cash flow for a takeover situation
• As a target, you make yourself vulnerable to takeovers => when you are financing the acquisition, you need to bring resources to buy the company. However, the free cash flow of your target can allow you to pay back whatever financing you take up to acquire the target.

Conclusion:

Empirical Observations

• It has been commonly suggested that companies are more likely to become acquisition targets if they are inefficient. However, this is not always the case, as many acquired companies are, in fact, both efficient and performing well.
• It is also commonly believed that underperformance makes a company more likely to be acquired, but this too does not always hold true.

These discrepancies indicate that there are additional reasons for acquisitions beyond simple notions of inefficiency or underperformance.

Alternative Reasons for Acquisitions

Fixing Agency Costs:

• Sometimes companies are underpriced due to inefficient management.
• From a societal perspective, acquisitions that reduce agency costs and improve efficiency are generally desirable.

Mispricing:

• Companies may be performing well operationally yet remain underpriced in the market.
• While “hidden value” theories suggest information asymmetries, in reality, these cases are rare. By the time a takeover occurs, the most relevant information is known.
• Often, it is not about asymmetry of information but differing opinions between management and the market.

Idiosyncratic Vision:

• Historical examples, such as the creation of early index funds, show that while everyone may have access to the same information, opinions about its implications differ.
• Large investment firms now specialize in passive investments, indicating that not all market participants agree on how to interpret the same data.
• This divergence in beliefs means market prices may not reflect a universal “reality,” and an acquirer’s unique vision can drive acquisitions.

Short-Term vs. Long-Term Perspectives:

• The market may apply different discounts and interest rates to short-term versus long-term projects, affecting perceived company valuations.
• Society generally disapproves of acquisitions driven purely by mispricing, as it distorts market reality and harms shareholders who sell at undervalued prices.

Additional Considerations

Breach of Trust:

• • Companies rely on informal commitments to employees, customers, and suppliers. Acquisitions that break these implied contracts are undesirable from a societal standpoint.

Synergies:

• • Combining efficient companies to create synergies can be beneficial, but society remains neutral.
  • Shareholders, however, may demand more than just synergy stories and prefer real managerial improvements rather than acquisitions that only rearrange assets.

Role of Upstaff

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Conclusion

In conclusion, tech acquisitions are far more complex than the simple notions of inefficiency or underperformance would suggest. From horizontal, vertical, and conglomerate strategies to reasons like efficiency gains, diversification, agency problems, market power, pre-bankruptcy grabs, free cash flow usage, mispricing, differing visions, and short- vs. long-term perspectives, the factors driving acquisitions are diverse and often interconnected. Society’s view can shift depending on the nature of the deal—acquisitions that fix agency costs and improve efficiency are welcomed, while those based on mispricing or breaching trust are looked down upon. Even synergy-driven deals once thought neutral or beneficial, may face skepticism from shareholders who prefer tangible improvements. Understanding the full range of motivations and implications helps us evaluate whether these deals truly serve the broader interests of shareholders, employees, customers, and the market as a whole.