Since graduating from business school, I’ve worked on buying, selling, merging and financing companies.
I just finished an eight year position at Sun Microsystems as head of business affairs in Sun’s corporate development group – while there, my group acquired and integrated twenty companies and coordinated our sale to Oracle Corporation which closed last January (I left shortly after on good terms).
During the “dot com” period I was CFO of a large venture backed company and ran corporate development for QuadraMed, one of my investment banking clients.
I started my career in investment banking, working for ten years as an M&A specialist.
During my career I’ve worked on deals of all shapes and sizes.
Right now I’m consulting on M&A and integration projects. My approach is unique – one person who’s seen all facets of deals from targeting to execution and integration, both as an advisor and as a principal.
How you position your company for an M&A exit depends on your industry. Today’s webinar is targeted to tech startups, but is also applicable to other technology-based industries -- life sciences and clean tech.
Applicability to other industries depends on:.
Competitive forces – industry concentration (i.e., market share held by top three / top ten, etc.)
Margins and multiples – e.g., low margin industries have a harder time with acquisition dilution / high multiple industries need growth
Attraction – why M&A is attractive in the industry – typical reasons include acquiring new products which will grow quickly, synergies (either revenue / cross selling or cost / consolidation) or standalone cash flow.
M&A volume – do companies acquire regularly in sector?
Seller ownership drives motivations – (founders, financial buyers, public stockholders) as do seller alternatives (stay the course, recaps, IPOs, sale)
So, what are the dynamics in the tech startup marketplace?
First, most folks associated with tech startups (founders, employees, angels, VC’s) want an eventual exit.
Exits are traditionally either IPO or sale to a larger company.
While popular in the “dot com” era ten years ago and still possible (Tesla), IPOs are much more difficult to pull off now. Why?
Sarbanes Oxley and other regulations increase the cost of being a publicly traded company
So much $$ is in institutional hands that few institutional investors have the bandwidth to invest in microcap issuers (say, >$100M total market cap)
Fewer banks cover microcap issuers, so “objective” banking research more difficult to obtain
Separation of research from investment banking in banks has decimated research
Therefore, issuers must be larger today to go public, which is a higher hurdle than ten years ago
Most common exit is to sell to a larger company – at least 10x as many as IPOs
So let’s focus on tech M&A
While there is a continuous stream of announced deals, the number of logical buyers for a tech startup is diminishing. Why?
Large company consolidation (think Sun / Oracle, Sybase / SAP, EDS / HP), particularly true in software
Large tech companies (think HP, IBM, Oracle) more business focused.
Some have stopped buying small companies.
Others have increased the hurdles for smaller deals.
Others don’t see “the needle move” with small deals
Economics harder to justify – investments in growth mean dilutive deals. P&L responsibility pushed to BU’s which are much more sensitive than the parent.
Because tech startups are generally either part of a grand acquirer’s plan or round out already full product lines, technical fit is essential (ex: Sun looked for IdM companies, but dismissed all the .net ones).
So, most often there are one or two logical buyers positioned to buy a tech startup.
Because there are few logical buyers, buyers have some oligopolistic powers:
Buyers generally drive timing, both of timing to sell and process
Buyers set the prices; note, however, prices firm when sellers have credible options
Buyers drive terms.
As a banker, I covered multiple industries. When asked to sell a company we would write an information memorandum / contact many buyers / conduct a two stage auction. That doesn’t happen often in tech M&A. Why?
Timing is driven by buyers: the old adage is true: “Tech companies are bought not sold”
So, direct approaches -- calling all the logical buyers or trying to just work with corp dev groups – rarely work.
How do you get attention from big companies?
Build relationships and expect them to take time to develop
They can take many forms, but working with a logical buyer early is almost always helpful (read list)
Resell agreements can be the best – cite RBAC with Sun.
Be a good partner – fair / easy to work with / etc. as your motives are two fold – build your business, and build a relationship
The process can take time – often 1-3 year – and it requires some patience and persistence.
A moment on corporate development groups
…read bullets
* So, developing the corp dev relationship is important, but not as important as establishing a solid / workable / productive relationship with the sponsoring BU
When a large buyer is ready to buy, they want to buy right then:
not six months before (business case / approvals not yet complete)
not a year later (market window may have closed, personnel may have changed, corporate priorities may have shifted, alternatives may have grown more attractive).
All YOU can do is be ready when they’re ready.
How do you know when a buyer is ready? Generally you can see a typical series of events play out (read list)
We’ve talked about there being a limited number of potential buyers (often just one) and the window of their interest is narrow. So,, once they’re ready, try to make it easy for them.
Counsel is critical – good ones keep deals moving, don’t have to research many points and truly work on getting to yes. Bad ones either miss key points (bad for seller) and / or are so conservative they don’t know when / how to show flexibility which significantly delays deals.
Bankers often have a place – more on them on the next slide
Pick your negotiating battles
If price is critical, look for ways to help them justify. Sometimes flexibility on terms can de risk a situation allowing buyer to be comfortable with a higher price (employment terms, for example)
Don’t make everything a battle
For buyer: this is a start not a finish (i.e., your exit). Put yourself in their shoes
Express excitement for post-closing potential
Employment flexibility
Tone is critical: folks hard to deal with in deals often make for poor employees.
Corporate books / records must be easily and quickly accessible
Several times I’ve worked on deals and have had executives or BU sponsors say “just stop, this is too hard, they’re too hard to deal with, we’ll find another way”
Hiring a sellside banker is an important decision. The decision hinges on two things: how good is the banker representing you and are the circumstances present for a banker to really add value.
Good bankers vs. bad bankers slide – read and elaborate on points
Circumstances that lend themselves to hiring a banker.
It’s never “too early” to organize your materials. Many companies keep electronic copies of important documents in a data repository such as ShareVault.
When you need to establish a virtual data room, please consider the following:
Must be easy to learn, easy to use, easy to add new users.
Expect M&A due diligence to be more comprehensive than financing due diligence
You’ll have to use your own DD list (or counsels, etc.) to start with, but will also get one from the buyer who may require you to go by their organization structure. Flexibility is key here, tagging is better than folders
How much information to release and when: my recommendation is that after an NDA, think long and hard about what’s truly confidential and what would be damaging in the hands of an acquirer if a deal fails. The list should just be a handful of items. Hold these back until you’re fairly certain a deal will occur.
Should you make the the VDR searchable? Provide download / print / read only? Again, make it as easy as possible for the buyer.
Read bullets.
I’ll now turn it back over to Dustin and will take questions.
