M&A

M&A stands for “Mergers and Acquisitions.” It refers to two processes that are often mentioned in the same breath. In a merger, two companies combine into a single new company. In an acquisition, one company buys another and remains in charge. In both cases, who owns a company and who runs it changes. When business news reports that a corporation has “swallowed up” a start-up, this is exactly what’s meant.

Why corporations prefer to buy rather than build

A large company could develop a new technology itself. But that often takes years and can fail. Buying an already established company is faster: the product, the customer base, and an experienced team all come as a package. That’s why acquisitions are so common in the tech industry.

For the seller’s side, a sale is often the hoped-for goal. The investors backing a young company eventually want to see a return. Either the company goes public, or it gets sold. The second path is the more common one and usually the simpler one, too. For founders, it often means a payout in the millions.

But there is another side to this. When only a few corporations buy up all the interesting competitors, customers are left with less choice. That’s why antitrust authorities scrutinize large deals closely. A well-known example: Microsoft's acquisition of game maker Activision Blizzard for around 69 billion dollars dragged on for nearly two years because authorities in several countries raised objections.

From the first conversation to the signature

It starts with an interest in buying and a rough price range. Then comes due diligence, a thorough examination of the target company. Auditors and lawyers review contracts, debts, and patents. They look for risks that could lower the price or cause the deal to collapse.

Payment happens in two ways. Either in cash, or in the acquirer’s own stock, meaning shares in the buying company. Often both are combined. In addition, key employees are frequently retained with bonus payments tied to the company, so they don’t leave right away.

After the signing, the hardest part begins: integration. Two different corporate cultures, IT systems, and ways of working have to grow together. This is exactly where many deals fail afterward. The purchase price may have been calculated correctly, but the hoped-for benefit never materializes.

M&A in the AI industry

Around artificial intelligence, there have been a great many such deals in recent years. Large providers buy small research teams to gain access to their expertise. There’s a specific term for this special case: acquihire, combining “acquisition” and “hire.” Here, it’s not the product that’s of interest, but exclusively the people.

Fixed phrases tend to show up in news reports about this. A letter of intent is not yet a finished contract. A deal is only “completed” once all authorities have given their approval. And the valuation mentioned isn’t always the price actually paid, since parts of the sum are often tied to future performance.

M&A also affects products people use themselves. Instagram and WhatsApp belong to Meta today because they were bought in 2012 and 2014. GitHub has belonged to Microsoft since 2018. After such acquisitions, prices, privacy rules, or entire features often change. Anyone who reads the announcement can get a rough sense of what’s coming.