When Evaluating an M&A Opportunity, Consider the Broader Digital Ecosystem

Traditionally, potential M&A deals are evaluated based on factors like market power and access to new capabilities. Consider Facebook’s acquisition of Instagram in 2012 for $1 billion. At the time, the deal was widely viewed as a defensive maneuver against a fast-rising competitor and a way for Facebook to strengthen its position in mobile photo sharing. But nearly 15 years later, the logic of the deal is seen in a different light. As our research suggests, an important and increasingly relevant source of value may have been overlooked: the opportunity to combine two ecosystems and create new value through enhanced connections with developers, partners, and other complementors.

Today, ecosystems are central to competitive advantage in industries from software and cloud computing to artificial intelligence. Yet leaders still often underestimate an important factor in merger and acquisition (M&A) decisions: To what extent does an acquisition create value through the resources and capabilities being acquired (e.g. talent, compute, and infrastructure) and to what extent does it create value through the broader ecosystem (e.g. app developers, data providers, and agent platforms)? Distinguishing between sources of value has become critical for evaluating acquisition opportunities.

The emergence of digital ecosystems has given rise to new sources of synergies beyond the usual ones considered in M&A. Traditionally, M&A scholars have explained acquisitions as acquirer firms seeking to gain market power or internalize the knowledge and resources of target firms. In this view, value is created by combining the assets, capabilities, and operations of the two firms, allowing the merged company to reduce costs, strengthen its competitive position, or grow faster than either firm could on its own. With digital platforms, however, we’ve observed that acquisition decisions are often motivated by how an acquisition may beneficially reshape relationships with developers, partners, and complementary technologies across the ecosystem.

For example, consider the customer-service software provider Zendesk’s acquisition of the messaging platform Smooch in 2019. For Zendesk, Smooch was an attractive target because it was integrated with a suite of messaging apps such as WhatsApp and customer relationship management (CRM) systems including Salesforce. But Smooch had also attracted a community of developers who built chatbots, automation workflows and industry-specific applications, that improved how businesses communicated with customers through the platform. By acquiring Smooch, Zendesk gained access to this network of complementors, which expanded the functionality of its offering and increased its value to customers.

In new research, recently published in the Strategic Management Journal, we developed a framework to describe the ecosystem structures that drive the best choice of M&A targets. The guiding principle is that smart leaders acquire targets to achieve ecosystem synergies—that is, value created through a novel combination of the acquirer’s and target’s ecosystem positions that improves the merged firm’s cooperation with third-party complementors.

Ecosystems Operate Differently

What are ecosystems and how do they reshape how you should evaluate acquisition targets? Ecosystems bring together multiple parties, beyond the single target firm, whose components must be interoperable and well-integrated in order to fully realize the synergies. Acquiring companies need to think differently about how acquisitions reshape ecosystems and anticipate the new opportunities that may emerge when two ecosystems are combined.

Three types of ecosystem synergies

We identified three main types of ecosystem synergies:

Strengthening. Acquisitions can strengthen existing connections with ecosystem partners by improving how the merged firm’s products and services work with those of developers, partners and other complementors, creating a better experience for users. In response, partners may invest in new integrations, applications, and innovations that further improve the combined solution. Users may also discover new ways to combine the offerings of ecosystem partners with those of the merged firm.

To illustrate: In 2018, Adobe acquired Magento, an e-commerce platform for businesses to build and operate online stores. The acquisition added commerce capabilities to Adobe’s platform, but it also brought a strong community of developers who created extensions and applications for merchants using Magento. These developers could leverage Adobe’s cloud infrastructure and broader set of tools to build more reliable and scalable applications. This strengthened connections with Magento’s ecosystem partners by making it easier for them to create products that worked seamlessly with the firm’s offerings. As a result, customers gained access to a broader range of functionalities and high-quality tools and services, making the platform more attractive to them.

Attracting. Sometimes an acquisition attracts new ecosystem partners, as firms build new products or create new connections to the merged firm. In this case, the number of complementary components in the ecosystem increases.

This is what happened when Facebook acquired Instagram. Once Instagram was integrated into Facebook’s ecosystem, new third-party developers began leveraging the broader developer tools and interfaces—building apps, managing marketing campaigns, and automating advertising processes. Instagram became more attractive to developers because Facebook’s platform offered analytics and monetization opportunities through ads. In general, new complementors can be attracted to either the acquirer’s products or the target’s, depending on where they see the greatest potential as a result of the acquisition.

Connecting. The third ecosystem synergy occurs when the acquirer’s and target’s complementors begin to connect to each other in new ways. Developers and ecosystem partners that previously worked only with the acquirer can now link to the target’s products, and vice versa. As a result, both groups can discover new opportunities through cross-connections that did not exist before.

Think of Salesforce’s acquisition of the data management platform Krux. Before the deal, third-party developers had built integrations that allowed Krux to draw on audience behavior and browsing data. After the acquisition, those developers could extend their integrations to Salesforce, tapping into customer and CRM data. Combining these previously separate data sources created opportunities for new connections, effectively adding a new multisided dimension to Salesforce’s platform.

Strategies for Pursuing Ecosystem Synergies

How can firms strategically seek these ecosystem synergies out when deciding which firm to acquire? Our research indicates that firms use three specific strategies, each based on the structure of the ecosystem in which they operate.

Acquire targets that increase the interdependence among their own components. In practice, this means firms buy other companies to make their own suite of products work together more seamlessly. Greater interdependence not only boosts internal efficiency; it also makes the expanded product suite more attractive to third-party developers. In our data, we see strong evidence that firms deliberately choose interdependent targets in pursuit of ecosystem synergies.

Acquire targets within existing ecosystem clusters. Clusters are groups of technologies built on similar programming languages, standards, or architectures. They are closely related to technology stacks. Acquiring within a cluster encourages complementors to build on the combined offering because it fits their technical expertise and taps into user relationships they already understand. In the e-commerce web-technology space we studied, acquirers preferred firms within their own clusters.

Reach for the center of the ecosystem. Acquirers may try to buy central ecosystem players so they can influence standards, control bottlenecks, or occupy strategic positions. This works if the acquirer already owns technologies that are needed by other ecosystem members.

Five Implications for Managers, Investors, and Founders

Our research also offers several implications for managers considering acquisitions, investors assessing deal value, and startup founders planning an exit via acquisition.

Look beyond the acquirer-target pair. For managers considering acquisitions: Value is determined not just through your firm’s own actions, but through the actions of others. An acquisition may unlock investments and innovations by complementors, enabling you to both broaden and strengthen your ecosystem.

Focus on targets that increase alignment with the broader ecosystem. Rather than looking at targets that are only a good fit with the acquiring company, leaders should look more broadly at firms within the ecosystem. It is also important for managers to not assume that complementors will automatically adopt or integrate the firm’s offerings; the merged firms’ set of components has to be attractive to external developers.

Distinguish ecosystem-driven from resource-based sources of value. For investors evaluating acquisitions: Understanding how a potential target fits into the broader ecosystem can reveal why an acquisition commands a particular valuation. It can also help assess execution risk: unlike internal synergies, ecosystem synergies depend on the actions of other ecosystem members that remain outside the firm’s control.

Use ecosystem clusters as a guide for where to build, invest, or acquire. For startup founders planning an exit via acquisition: Because acquirers tend to buy firms that sit within their existing ecosystem clusters, aligning your product with the clusters where potential acquirers already operate may increase strategic fit and make integration easier. Locating your product in the “right” cluster helps you create links to complementors who already have the expertise, integrations and user relationships that acquirers value. When talking to potential acquirers, highlight how your third-party connections and integrations can extend the acquirer’s ecosystem. 

Consider the context. While our research findings apply most directly to digital ecosystems—where complementarities, integrations, and third-party developers shape value creation—the broader lesson is that strategy must fit the structure of the particular ecosystem in which you operate. The effectiveness of any acquisition depends on the position you occupy in the ecosystem structure, the components you control, your ability to mobilize complementors, as well as the position of the target.

Executives who grasp this shift in M&A logic—from acquiring and controlling resources to orchestrating interdependencies and enriching the ecosystem—are those who stand to gain the most from acquisitions as ecosystems continue to reshape industries.

Author’s note: This research is funded by the European Union under the Marie Sklodowska-Curie Postdoctoral Fellowship 2023. Views and opinions expressed are, however, those of the authors only and do not necessarily reflect those of the European Union or the European Research Executive Agency (REA).