An accretive acquisition adds value to the acquiring company by increasing its earnings per share (EPS) and other measurable factors. This type of acquisition can be beneficial for the acquiring and the acquired companies, as it can help increase the overall value of the combined entity. Entrepreneurs and investors from New York to Silicon Valley use this strategy to boost their market presence.
How accretive acquisitions work
In an accretive acquisition, the acquiring company purchases another company with the goal of improving its financial health. This can be achieved in several ways.
The acquiring company may be able to reduce costs by consolidating operations, eliminating redundancies and streamlining processes. The acquiring company may also increase revenue by leveraging the acquired company’s customer base, expanding into new markets or introducing new products or services. Financial metrics can be improved by using the acquired company’s cash flow or balance sheet to pay down debt, buy back shares or invest in growth opportunities.
Mergers and acquisitions are common, especially in the tech space. Examples of such accretive company purchases include big market-changing deals from the past ten years.
Facebook’s acquisition of Instagram
In 2012, Facebook acquired Instagram, a popular photo-sharing app, for $1 billion. At the time, many analysts questioned the high price tag for a company with no revenue. However, the acquisition proved to be accretive for Facebook, as Instagram’s user base and engagement levels continued to grow, contributing to Facebook’s overall revenue growth.
In 2019, Instagram generated $20 billion in revenue, representing more than a quarter of Facebook’s total revenue.
Microsoft’s acquisition of LinkedIn
In 2016, Microsoft acquired LinkedIn, a professional networking site, for $26.2 billion. The acquisition proved synergistic for Microsoft, allowing the company to expand its offerings in the enterprise software market and leverage LinkedIn’s user base to drive growth in its cloud computing and productivity businesses. Since the acquisition, LinkedIn has continued to grow, with revenue increasing from $3.0 billion in 2016 to $8.4 billion in 2020.
Amazon’s acquisition of Whole Foods
In 2017, Amazon acquired Whole Foods, a natural and organic grocery chain, for $13.7 billion. The acquisition allowed Amazon to expand its presence in the grocery market and leverage Whole Foods’ physical stores to drive growth in its online grocery business. Since the acquisition, Amazon has continued to grow its grocery business, with online grocery sales increasing by more than 500% in the first quarter of 2020.
Accretive acquisitions as a business tool
Accretive acquisitions can be a powerful tool for companies looking to improve their financial metrics and drive growth. By leveraging cost, revenue and financial synergies, companies can create value for both shareholders and customers.