Acquiring other companies is a growth strategy used by businesses to bring new products or services, talent, and clients under their company umbrella--or to effectively shut down competitors.
Buying out companies can be a risky business, yet Google does it regularly and it seems only to feed its growth. In the last year alone, the search and advertising giant has acquired more than 35 other businesses, swallowing up artificial intelligence, satellite, online advertising, and home monitoring companies, among others.
There's much to consider when you're in a position to bring another company into your fold. The primary considerations are typically financial--are there cost savings to be had? Will it result in an increase in revenue?
The company in the position to acquire another has to be reasonably certain that doing so is part of its sustainable growth plan--that staff retention, customer service, and investor relationships will remain intact.
Acquisitions are complicated, with great risk alongside the potential reward.
Yet Google CEO Larry Page boils it all down to one simple question, according to David Gelles of the New York Times.
Page's "Toothbrush Test" flies in the face of traditional acquisition strategy. He doesn't much care about the financial details--the cash flow, earnings, etc. He doesn't even care all that much about sales.
Is he crazy?
That would be too easy, to write him off for eschewing old-school acquisition research. Whatever he's doing, it's working. What started as a few people working together in a garage has exploded into a global advertising Goliath, one that took in $55 billion in revenue last year.
So what is it that Larry Page is really looking for, if not sales or proven performance, in a company when Google is considering an acquisition?
Page will ask, "Is this something you will use once or twice per day, and does it make your life better?"
(Toothbrushes, of course, fall into both categories.)
Google's VP of corporate development, Donald Harrison, told Gelles, "Larry will look at potential deals at a very early stage. Bankers can be helpful, but they're not necessarily core to the discussions."
Google acquires other companies for innovation. Sometimes it does so for patents and intellectual property, but often, its strategy of acquiring startups and little-known brands is simply the result of looking outside itself in search of ways to innovate faster.
This is challenging with startups, of course, as entrepreneurs and founders are quite often obsessive in their methodology--it's their baby. Becoming part of a larger organization means losing control.
Google is different in that it tends not to fold companies into its own, but nurture innovators by giving them space and autonomy even after the acquisition. Recently acquired Nest, for example, still operates as an entity separate from Google under the leadership of founder Tony Fadell.
Sometimes, Google's faith in its acquired talent is so great that it takes risks few other companies would, as it did in not only letting Neal Mohan continue to lead DoubleClick after its acquisition but also putting him in charge of AdSense.
Yes, Google does things differently. And it's working. The company's commitment to serving a useful purpose in the lives of consumers has resulted in Google-infused search, social, and mobile experiences of millions of people worldwide.
The next time you're weighing a product or acquisition, or even thinking about building a product or feature, give it the toothbrush test. That's not to say due diligence shouldn't come after (Page has people for that), but it's a great initial qualifier.