Acquisition of Small Companies as a Source of Innovation for Large Companies

Source of Innovation for Large Companies

We are in a business world where every day there is more competition and more challenges for companies. It is in this complex environment that innovation transforms into the primary source for competitive advantages.

Recall that a competitive advantage is a characteristic that develops companies and allows them to differentiate themselves from the competition and gain success. Within these competitive advantages you will find examples of brands, cost efficiency, patents, FDA or other sanitary registrations, the control or access to distribution channels, as well as the know how and capacity to create innovative products.

In many cases, a source of innovation is the acquisition of start ups or medium-sized companies becomes the perfect accessory to R&D (research and development) departments of large companies. As Cisco’s president and CEO John Chambers says, “If you don’t have the resources to develop a component or product within six months, you must buy what you need or miss the opportunity.”

I continually find myself with entrepreneurs that are developing ground breaking products and disruptive technologies with the capacity to generate important changes in the world. A disruptive technology is one that has the capacity to change an industry, for example the scanner practically put an end to fax and the digital camera was the end for roll photography, at least in non-professional photography. Some leading companies in the world know this, and are continually acquiring companies as a source of innovation, for example Facebook acquired Instagram, Unilever acquired the razor blade company Dollar Shave Club which reinvented how to deliver their products to the consumer with a cost leadership strategy, Johnson & Johnson licensed the technology for stents from Dr. Julio Palmaz, and Apple acquired the headphones and music by subscription service, Beats by Dr. Dre. Others missed their opportunity, for example Blockbuster refused to associate with Netflix in 2000 and Yahoo had no interest in acquiring Google for US $1M in 1998.

In the same way, often times I encounter large companies that aren’t interested or aren’t analyzing the possibility of acquiring a small or medium-sized company because it does not have a significant EBITDA or income that can significantly impact the financial statements.

“It can be hard for big corporations to promote invention. You cannot prove in advance that any new idea will work….In other words, they’re willing to pay a pretty big markup for not having to take that risk on themselves.”

If you are an executive of an important company, I invite you to consider allocating part of your resources within your innovation strategy to the investment of start-ups that have the potential to be completely acquired when they are in a more mature phase and that can be integrated into your company by accessing your distribution channels and commercial strength.

“In essence, [such an open-innovation tactic is about letting] ‘the little people invent’ and then helping commercialize the innovation through the resources of a much bigger company.”

In emerging countries, in my case Colombia, we are behind in R&D and innovation for companies both large and small. According to World Bank3, our country invests only 0.20% of GDP (gross domestic product) in these areas, while Japan invests 3.58% and South Korea 4.3%. It is therefore necessary to pay attention to this issue which can have a transcendental impact on the future results of your company and on the ability to generate new competitive advantages.

Written by Simón Restrepo Barth, professor of Finances and Partner of ONEtoOE Corporate Finance with collaboration by Julie Steppan, Investment Banking Analyst.


1. Bower, Joseph. “Not All M&A’s Are Alike – and That Matters”, Harvard Business Review, March 2001.
2. Vella, Matt. “Innovation Through Acquisition”, Bloomberg, February 2008.
3. “Research and Development expenditure (% of GDP)”, United Nations Educational, Scientific, and Cultural Organization (UNESCO) Institute for Statistics., 9 June 2017.

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