This happens for sure, but is a little bit less common than you would expect.
The problem with acquiring competitors is they are like weeds — there are always more of them. Also, M&A is expensive. It’s usually cheaper to deploy that effort into beating a smaller competitor. (Not always, and M&A doesn’t count against P&L, but this is a tough approximation).
So when does acquiring a competitor make sense?
- Acquiring a startup that is doing better than a BigCo’s efforts — or potentially can. This definitely happens.
- If a new start-up starts to potentially, truly disrupt a space. Big Companies will buy a start-up that enters one of their core spaces and truly disrupts it with new, differentiate technology. This is especially common in “harder tech” segments, but happens in software too. See, e.g., Facebook buying Instagram.
- When you can create an oligopoly+ — when the Top 2 merge and become/remain dominant. You can do pretty well as the #2 player in a space with the strategy, if you are growing as fast as the #1 player.
These are worth the efforts, at least potentially.
Buying all the small start-ups that pop-up in your space isn’t that effective, however.