Companies may choose to invest in other companies for a variety of strategic reasons. This allows them to diversify their business, spur growth through acquisitions, or create synergies by combining complementary resources and capabilities. By acquiring stakes in other firms, companies can gain access to new technologies, expand into new markets and geographies, secure key supplies or distribution channels, and acquire talent and expertise. Of course, there are also risks involved with such investments, so companies need to carefully evaluate targets and ensure there is a strong strategic rationale. Overall, inter-company investments allow firms to strengthen their competitive positioning and quickly enter new areas. When executed well, they can create significant value for shareholders.
Diversifying Business Lines and Revenue Streams
One reason a company may invest in another is to diversify its business model and revenue sources. By expanding into new product areas, service offerings, and customer segments, the company reduces reliance on its existing operations. For example, an auto manufacturer might invest in an electric vehicle startup to diversify into the high-growth EV market. Or a pharmaceutical company might invest in a medical device maker to expand beyond drug development. Diversification helps cushion the parent company from downturns in any one market and provides new avenues for growth.
Entering New Geographic Markets
Investing in foreign companies provides a fast way for firms to expand internationally. Rather than building new operations from scratch, they can acquire or partner with established local players. These targets have existing infrastructure, brands, distribution, and customer relationships in-country. This beachhead helps the parent company quickly enter the new region. For example, a retailer may acquire a smaller chain in a foreign market to quickly gain store locations, local know-how and scale. Or a technology company may invest in emerging market partners to adapt and distribute products to local needs.
Acquiring New Capabilities and Assets
Companies often lack critical capabilities needed to expand into new areas. Research expertise, technical specialties, production facilities, and other assets may need to be acquired externally. By investing in another company, a firm can immediately gain these needed capabilities without having to build from scratch. For example, a pharmaceutical firm may invest in a biotech company to acquire drug discovery techniques, labs and pipelines. Or an automaker may invest in a battery startup to quickly acquire battery technology vs trying to develop it alone. Gaining proven assets and capabilities through investment helps derisk entry into new spaces.
Gaining Cost and Production Efficiencies
Companies may invest in other firms along their supply chain to improve cost efficiencies and security of supplies. Automakers, for example, often hold stakes in parts suppliers to gain preferential pricing and reliable access to components. In some cases, they may acquire suppliers entirely and gain greater control over the production process. Companies may also invest in other downstream channel partners, like distributors, to improve go-to-market operations. Overall, strategic investments along the value chain can provide cost, quality and reliability benefits.
Entering New Customer Segments
Investing in companies with complementary customer bases allows a company to expand its reach. The two firms can cross-sell each others’ product and service offerings to their distinct customer segments. For example, an enterprise software firm may invest in a company targeting SMB customers to access the SMB market. Or a company with consumer products may invest in a B2B vendor to expand into corporate and institutional buyers. This type of horizontal investment creates opportunities to enter adjacent customer spaces and provide growth synergies.
Gaining Complementary Technologies and Innovations
Investing in tech startups and entrepreneurs provides an avenue for established companies to tap into emerging innovations. Rather than relying solely on internal R&D, larger firms can gain exposure to new technologies and IP through investments in ventures developing cutting-edge solutions. They can then leverage these innovations to complement their existing capabilities and product portfolios. For example, a medical device company may invest in a digital health startup working on a novel care delivery platform. Bringing the two together creates opportunities for technology integration synergies down the road.
Companies invest in other companies to diversify their revenues, enter new markets, acquire capabilities and assets, gain cost and supply chain efficiencies, access new customer segments, and complement their technology and innovations. When executed strategically, inter-company investments provide opportunities for growth, risk reduction, and value creation.