Obtaining Maximum Value for Your Company in Today’s M&A Market
At the end of 2009, we were optimistic that the M&A markets would pick up and become the key near-term source of liquidity for investors before any real momentum in the IPO and capital markets kicked in. We also believed the technology sector, led by reemerging growth and profitability, would be at the forefront of the deal flow. And finally, we envisioned a good M&A ecosystem, with sellers motivated by the need for exits and buyers in search of much-needed new products, innovation, and revenue growth.
But our fairly positive stance for the technology sector was tempered by caution, given the cloud of uncertainty surrounding the economy and its fragile recovery. So, as we approach the middle of 2010, are we sticking to our guns?
The short answer is yes. But acquirers and investors are still wary, and they’re doing much more diligence before closing deals. They’re also more partnership-focused—that is, they view an acquisition as the continuation or initiation of a partnership with the former management or founders of the purchased company. Thus, their diligence expands beyond the traditional financial or technology variables.
The current consolidation trends will continue, and as a result it’s critical for sellers to understand how to demonstrate and maximize their value in the eyes of the consolidators. So what should those who are positioning themselves for liquidity do to improve their prospects? Based on our insight and conversations with key industry leaders, here’s our best counsel on the subject:
· Focus on building value. Create value in your products, for your customers, and in your underlying industry segment. Value will always be recognized and rewarded. This means you can’t set out to be bought or sold; you need to focus on the core business and establish value through your product in order to achieve strategic and financial success.
· Understand where your company, technology, or service sits in the overall ecosystem of your segment. Know who all the players are, how you match up, who your competitors are, and where you provide value. By understanding your ecosystem, you’ll be better able to guide your company and your product or service toward true value creation. You’ll also learn how you fit into current consolidation trends and, ideally, gain insight on how acquirers view your company from the outside. In many cases, this can differ from your internal viewpoint.
· Stay close to your strategic partners. Form close relationships with strategic customers, resellers, and industry leaders—but don’t get so close that you lose competitiveness or independence. When you develop these relationships, a host of potential acquirers is only a phone call away, and they already understand your value proposition. Be sure not to sign exclusivity agreements, joint ventures, or any other arrangement that could potentially lock other interested parties out of a potential deal or force an acquirer to be locked into business with a competitor.
· Make sure your company’s overall strategy is aligned. This means your acquisition criteria are shared—and agreed on—by key members of management, the board, and investors. A lack of alignment can distract your company from building value, and it can be seen as a weakness by potential acquirers. It’s easy for values to shift during transaction negotiations, so having core fundamentals is key to maintaining solidarity.
· Make sure you have the best management team possible in place. Your company’s leadership is more important than ever. And many acquisitions are now being carried out as a way for acquirers to bring on thought leaders or a great management team. Retention of that great management team will likely be an important component of any transaction’s negotiations. This requires planning and forethought with incentive plans and equity structures long before the transaction is realized.
· Understand the metrics that will best demonstrate your company’s value proposition. Many acquisitions focus solely on profitability or revenue growth, but other core trends—such as showing a strong ability to monetize a historically free product or service—let an acquirer know that the product or service has real value to customers. Understand how to demonstrate the value in your pitch.
· Don’t let a possible or pending transaction consume your business and management. Again, focus on building value in your prime area of expertise, and when a transaction possibility becomes active, ensure that your management team remains focused. Transactions generally take longer and are more complicated than originally estimated, and this can distract management for an extended period of time.
· Be bought, not sold. As a seller, you can gain a better deal by positioning your company in such a way that an acquirer can’t pass you up. The best marketing is to demonstrate value and threaten your segment’s ecosystem with innovation so that acquirers need your business to stay competitive as part of their long-term strategy.
There’s no simple way to maximize value as a seller in today’s uneasy marketplace. But by adhering to fundamentals, companies seeking liquidity can achieve many, if not all, of their goals.