The IBD Network ran its bi-monthly Strategy Series last night in Menlo Park. The subject was Merger Mania: Positioning your company for an acquisition. On the panel were corporate development execs from Yahoo! and Business Objects, as well as advisors from Citigroup and Perkins Coie, the law firm.
Here are some notes and lessons which I took away from the debate among 60 Silicon Valley entrepreneurs, investment bankers and acquisitive firms.
General comments
- The main challenge for acquiring firms is weeding through all the potential deals. Business Objects gets offered between 10-20 potential deals a week, of which it may see 5-10 a month. There’s about a 1 in 100 chance a proactive approach will get serious consideration. This is mainly because companies like BO and Yahoo! have their own acquisition plans which take priority over ad hoc opportunities.
- Acquiring firms will monitor adjacent markets to their own, rank them, and then track and rank the firms within each market.
- There is no particular stage at which companies are bought, if the fit is right, companies can be bought pre-revenue.
- 80-90% of acquisitions don’t work out, but the more a company acquires, the better it gets at it.
- Deals mainly fail to go through do to disagreements on price. Prices can be calculated from a model including the value of comparable firms, recent deal prices and discounted cash flow (provided there is cash…)
- Corporate development teams are kept up at night by the thought that another firm might buy their prospects first. They need to move quickly.
Lessons and guidelines
- Understand that companies are bought, not sold.
- Be realistic about the value of your company.
- Don’t ‘position’ yourself to be acquired, concentrate on the business, but do consider how strategic moves impact the attractiveness of the firm for acquisition – sell early enough to leave value for the acquirer to enjoy.
- Acquiring firms look mainly for strategic fit, then talent (technical and management team), then financials (growth prospects) and then brand/market share etc. Much of the secondary points wrap up into making the right strategic fit.
- When selling their firm entrepreneurs must disengage and be prepared to let go – this is a stumbling block.
- The valuation model should become the working budget post-acquisition.
- Figure out the integration up front. Make sure you have a Day One plan – what are you going to do, who is going to do it and by when?
- Ensure staff are engaged in the process – staff are often the biggest asset.
- Customer diligence is hard since sellers only put forward happy customers and for a public company, it cannot hint at a possible acquisition before announcement.
- Although venture capital firms can assist a deal by making introductions and ensure commercial rigor, they can also complicate them since the goals of the VC and the vendor might not be aligned.
- Buyers will walk away from deals with ugly capital structures, non-GAAP accounting or if they don’t think the company can’t become SOX compliant swiftly
- Partnering is a good first step to ensuring a successful acquisition e.g. Yahoo!/Overture
- When trying to get in with a buyer, find the right division and check the strategic fit. You need a corporate sponsor. The best way in is not always through the corporate development team or the CEO, look for other contacts inside the company to make introductions for you since it will get more airtime.
- Acquirers don’t like earn-outs since they are ambiguous. It’s better to make the effort to arrive at an agreed price. If you do opt for an earn-out, set the targets on revenues rather than income since it is easier to measure. Earn-outs are the biggest source of follow up litigation post-acquisition – lawyers love them.
The panel consisted of:
Mark Albert, partner, Perkins Coie
Ivan Brockman, managing director, Global Technology Investment Banking Group, Citigroup Global Markets
Steven Mitzenmacher, director, corporate development, Business Objects
Keith Nilsson, vice president, corporate development, Yahoo!