I have come across an M&A in recent years where a large local corporation (Company A) shortlists smaller companies that have yet to attract any investments in the past. The rationale being that such companies will not know how to negotiate properly and the large corporation will end up getting a good price and a controlling stake in the smaller company. The particular seller in this case (Company B) is operating in a completely different market from Company A.
In 3 years’ time after the initial acquisition, Company A will move to put up Company B for sale, increasing the valuation by a large margin many times over the original valuation when company B was bought. It seems like a very simple strategy, ethics aside. Any downside to this strategy?