How do we get acquired?
Briefing on Getting Acquired
In Solving the Merger Mystery, Deloitte Consulting suggests that you should plan and structure for integration early on and focus on speed only when the opportunity to be acquired comes along. This is true because all things being equal, the faster you can get acquired, the better. Being prepared increases not only the probability of your deal going through, but also the probability of success.
This is enhanced even more if the integration is well planned and orchestrated, and if it begins very early in the transaction, namely as early as the introduction phase between buyer and seller. In other words, performing internal due diligence prior to selling a business venture enables management to identify and address weak spots and hidden opportunities that affect its value.
Deloitte Consulting further suggests that you should be prepared to address retention issues early on. The key to M&A integration success is to view retention across three dimensions: the employees, the customers, and the suppliers. Also, having a high-level transition team comprised of well-respected executives allows your venture to rapidly mobilize the integration effort. But remember there is still a business to run, as they will face the challenges of delivering on day-to-day operating commitments. Finally, keep your M&A strategy updated and discuss it with your board and venture team members regularly.
Getting on the Radar of Potential Buyers
First, consider that from the viewpoint of potential buyers, there are five strategic alternatives to acquiring a venture:
1. They could “build internally,”
2. Form a joint venture
3. Form a strategic alliance
4. Enter into a licensing arrangement
5. Form a business partnership.
Knowing that they are faced with these strategic alternatives, you should ideally be in one of these relationships today in order to facilitate getting acquired tomorrow.
Second, if you don’t have any such strategic relationships today, go create some. Consider all the players on your value map. Get to know CEOs, CFOs, and CTOs in your ecosystem. Get known in your ecosystem—get analysts writing about what you are doing. Analysts at private boutique investment banks are always looking for something new to write about. The bankers they support are always looking for something to talk about, and likewise, the bankers could be helping clients look for a deal.
Third, be a first prover, and buyers will come knocking. Cisco Systems is one of the most acquisitive companies ever. They completed seventy-one acquisitions from 1993 to 2001, and twenty-five in 2000 for $12 billion, paying between $500,000 and $2 million per employee. Most importantly, 75 percent of their acquisitions were start-ups with no products shipped!
Managing the Deal Process and Beyond
As the saying in the M&A business goes, “Finding the right partner is the easy part. The hard part is making the marriage work.” But we know that getting to the altar is no easy part either. It is your job to keep the momentum in the deal, as the longer the deal process drags on, the more likely it is to fall through. And nothing slows down the deal more than issues on valuation.
So be prepared to understand and work their “levers of success.” Always be thinking on their side and how acquiring your venture will deliver value to their company. Your potential acquirer is working one of three key levers. One is efficiency, as they are looking to realize economies of scale and scope, and maximizing cost controls. The second is increasing their market leadership, as they are looking to enhance their company’s brand reputation and securing technical knowledge of a competitor, or complementary venture. The third lever of success is reinvention. Their goal is not only changing their company, but also trying to tilt the entire industry in their favor.
Have a common sense approach to valuation and be prepared well in advance. Uncover “comparables” from looking at your direct competitors’ business more closely. Examine S-1 Registration filings of companies in your space. Work with venture capitalists and investment bankers who have access to great valuation reports from research firms like Venture Economics. Research deals matching your industry, keywords, financing time period, stage of development, even geographical location. Develop a keen understanding in the valuation methodologies and pricing drivers that might be particular for your industry.
The successful closing of a sale may seem like the natural point in time to take a step back and relax. But working to ensure post-merger success is a major concern of the acquiring company. Most M&A failures are attributed to errors committed during the integration process. However, success stories can also be found. For example, Cisco claims a 94 percent retention rate of the key employees; all during the M&A process they gauge the chemistry, the culture, and the environment for entrepreneurial spirit that exists between them and the venture they are acquiring.
In summary, ventures that integrate effectively and have a clear understanding of the M&A process are ready to implement an integration strategy from day one. It is important to realize that companies looking to acquire your venture want to see continued momentum and focusing throughout the integration process.
Making a Deal with Intel Capital
In 1988 Jeff Lawrence started Los Angeles-based Trillium Digital Systems after he was laid off. He says, “Getting laid off was the catalyst. Then it came down to assessing what I could do. I had knowledge in software development. And I figured if it didn’t work out I still had the skills to go back and work for someone else.” Together with his partner Larisa Chistyakov, they pooled about $1,000 and started a company.
After about five years, they went out and raised some $14 million from an investment bank and Intel Capital to fuel their growth strategy. In 2001 they sold their company to Intel for $300 million in cash and stock. Kirby Dyess, vice president and director of operations for Intel Capital, explains the first step in making a deal with Intel: “It’s important that you really need a clear direction and strong sense of the value drivers before going into the deal.”
And Lawrence found what he called a “great steward inside” Intel to help with the integration. They talked all the time, “even on Sundays when the deal was going sideways.” Lawrence discovered that valuation was “more art than science” and that “it became a matter of opinion.” His advice is that “to be successful you have to listen to people and be willing to change. You need to communicate with your people so they know what is going on. Encourage their input.”