5 Ways to Improve an M&A Outcome
Lately, I’ve been having a lot of conversations with founders about mergers and aquisitions (M&A). Some founders are in hot sectors and fielding unsolicited offers from cash-rich incumbents. Others are nearing the end of their runway and looking for a “soft landing”.
Just like fundraising, getting acquired is something that most founders only do once (if ever). It’s hard to learn about the topic, as there are far fewer blog posts on how to navigate an acquisition process than there are on how to fundraise.
There is, however, Mergers & Acquisitions for Dummies 🤣
Having been through three acquisitions myself (and observed many more from the sidelines), I thought I’d share some tips.
Here are 5 ways to improve the outcome of an M&A process:
1. Have Plenty of Runway
This may seem obvious, but similar to fundraising, it’s essential that you have plenty of runway before you begin an M&A process. In some respects, it’s even more important. That’s because one of the basic stategies that corporate development professionals use when trying to acquire a company is to run out the clock. The less runway you have, the more desparate you become (and the cheaper you’re likely to be).
In fact, many corp dev teams are compensated based on how cheaply they’re able to acquire a target company.
Some acquirers are infamous for doing everything in their power to drive down the price of an acquisition, including driving startups to the edge of insolvency.
Actual footage of a VP of Corporate Development
As with any negotiation, one of the most powerful things you can do is to be in a position to walk away. So make sure you have at least 6 months of runway (or more) when you start a process. And if runway is an issue, make sure you’re fundraising in parallel to exploring potential acquisitions.
2. Get Advice from People Who Have Actually Been Through an Acquisition Process
As with many topics, most founders turn to their investors when seeking advice about navigating a potential acquisition. But guess what? The vast majority of investors have never actually been through an acquisition process.
Now, it’s true that many investors are expert negotiators (which makes sense, as it’s a core part of what we do). But M&A negotiations can be very different from fundraising negotiations. The best corp dev teams employ strategies that most VCs have never seen firsthand. So while investors are more than eager to suggest strategies for “maximizing outcome”, in my experience much of this advice is…well…basic.
Unless your investor has personally been through an acquisition or comes from a corporate development background (like Villi Iltchev at Two Sigma or Code Cubitt at Mistral), you should assume that your VCs will be giving you advice on how to play checkers while your corp dev opponents are playing chess.
When I went through my first acquisition process as a CEO and was trying to wrap my head around the (seemingly confusing and contradictory) actions being taken by the corp dev teams, my first calls were to my investors. They gave me plenty of sound and logical advice, but the most important thing they did was to make two key introductions:
To a portfolio founder who had been through 4 successful acquisitions
To a portfolio founder who had previously been in a corp dev role at a major tech company
All of a sudden, the advice I was getting went from simple parlor tricks to black magic.
So when your investors are done giving you the 101 on how an acquisition works, ask them to introduce you to the founders they know who've been through multiple acquisitions and any corp dev (or ex-corp dev) people in their network.
3. Figure Out the Real Motivation of the Acquirer
One of my favorite quotes on this topic is from Alexandra Greenhill, CEO and Founder of Careteam:
“The price you’re worth depends on what the buyer needs you for.”
When a potential acquirer shows interested in our company, founders naturally jump to conclusions about their motivations.
“They’re excited about our technology!”
“They’re trying to get into our market!”
“They’ve had the same epiphany that I had about the future…!”
And so on. But frequently, a potential acquirer’s true motivations have little to do with our ego-driven assumptions.
Early in DataHero’s journey, we were approached by the corp dev team at Pinterest about a potential acquisition. We had received a lot of press when we came out of stealth and were fielding a considerable number of inbound calls from companies hoping to white label our product. The Pinterest team needed to develop analytics and reporting capabilities in advance of releasing their advertising offering, so naturally we presumed that they wanted to incorporate DataHero as the foundation for those capabilities.
It turned out that Pinterest only wanted to bootstrap an in-house analytics team and had zero interest in any of our IP. (And they subsequently floated an acquisition offer that was priced accordingly.)
There are a wide variety of motivations that drive acquisition interest. Many will value your company lower than what you might hope for. Some will value it much higher. Uncovering the true motivation can help drive your strategy and is key to improving your outcome. Common motivations include:
Humans (individual contributors, key executives or entire teams)
Tech / IP
Revenue (this can be a direct revenue stream, access to a new market or customer segment, or a product the acquirer believes they can sell easily into their existing customers)
Cash (believe it or not, many for-stock acquisitions happen because the company being acquired has a lot of cash in the bank)
Press / Stock Price
4. Figure Out if there is a Forcing Function
Similar to the importance of unconvering the motivations driving a potential acquirer’s interst, it’s important to discover whether or not there’s a forcing function influencing the timing.
When Vancouver’s Picatic was in acquisition talks with Eventbrite, the founder sensed a level of urgency that he couldn’t figure out. He was trying to slow play the opportunity (in order to drum up competitive offers), but the Eventbrite team was pushing for a quick resolution.
Eventually, he uncovered that the urgency was tied to Eventbrite’s plans to go public — they needed to complete the acquisition in a matter of weeks. This one piece of information gave him considerable leverage with which to negotiate the acquisition of his company.
Understanding whether or not there’s an internal forcing function driving a potential acquirer’s timeline is another key way you can improve your outcome.
5. Always Take the Meeting
If someone in a corp dev role ever reaches out to you about a meeting — even if you’re not thinking about an acquisition — always, always, always say yes.
Take the meeting, but come prepared to say nothing.
This is the opposite advice I typically give when it comes to fielding inbound calls from potential investors. So why should you take corp dev meetings? Because you never know where they may lead.
Shortly after Aster Data came out of stealth in 2008, we were approached by Teradata’s head of corporate development about a meeting. We were an entirely inexperienced team and Teradata was our bogeyman — the company we saw as our #1 competitor. We were paranoid that they would try to suck each and every secret they could out of us, and were inclined to say no. But our investors insisted that we take the meeting.
“Take the meeting, and just listen.”
That meeting was the first time that Teradata attempted to acquire Aster Data.
Over the next several years, as the “Big Data” industry emerged and Teradata struggled to develop a competitive solution, we fielded multiple acquisition offers from them. Each approach was met with skepticism from our side. We were convinced that, should we ever enter a process, Teradata would extract all of the information they wanted during diligence, cancel the acquisition, and turn around and crush us with a well-funded competitive offering. (It was years later that we discovered just how inept their internal attempts to build a big data offering had been, and this was never a realistic scenario.)
In 2010, rumors were flying that Teradata’s main competitor, Netezza, was about to be acquired by IBM. That’s when they approached us with a much more serious offer. But we still didn’t trust their motivations. Sequoia’s Doug Leone — one of Aster Data’s board members — proposed a “test” to see how serious they really were: ask them to invest in our series C, with no information rights, no right-of-first-refusal and no access to proprietary information. If they were willing to do that, then we would know that they meant business.
Days after we completed our Series C, IBM’s acquisition of Netezza was publicly announced. Our own acquisition talks then began in earnest, and on Christmas Eve, 2010, we signed the LOI to be acquired by Teradata (thus kicking off the most painful, drawn-out diligence process I’ve ever experienced).
Beyond the opportunity for serendipty, the biggest reason to always take corp dev meetings is to open channels of communication. Should you ever need to spin up an acquisition process (or ramp up competitive offers), you’ll already have relationships with the people you need to speak with.