Not all mergers and acquisitions are the same. Buyers can have very different reasons for wanting to acquire your company. These reasons can have a substantial effect on what happens:
As with selling anything, the more you know and understand your buyer pool and the buyers in it, the better you can tailor your pitch and the more negotiating power you will have.
When it comes to acquisitions, you can generally think of them in two different ways: financial or strategic.
Financial buyers are looking at this purchasing opportunity as buying a financial asset—a stream of cash flow or return on their investment capital. Buying businesses is their business and form of investment. They may be more conservative in their offers. They are more likely to keep the current executive team in place for a longer period of time, provided the numbers are being met. Financial buyers may be more likely to use financing and debt to acquire your company. These transactions are more likely to happen later in a company's life cycle and typically the players going after this type of acquisition are for the most part private equity firms.
Keep in mind that if your startup has yearly revenues of less than $5 million, a financial acquisition may not be an option as your revenues will be under expectations of potential buyers.
There can be a variety of strategic considerations when one company wants to acquire another. These buyers are typically already in your space in some way, or they want to be. They may look to own and operate you with some independence or absorb and merge your company as the parent. Their offers may be more aggressive, and it is more likely the leadership will be replaced, at least within the next three years, if not on sale. In addition to cash, strategic buyers will often offer stock in their company or a combination of both. Strategic acquisitions may happen far earlier than financial ones.
The financial reasons for making an acquisition are relatively clear-cut. The strategic reasons can be more varied and nuanced. The following sections examine some of the reasons for making a strategic acquisition.
Growth is what companies live and die by today. Sometimes it is easier to buy growth than to build it. This may be for customer acquisition, revenue, and even profits. Consider Facebook's acquisitions of Instagram and WhatsApp. Facebook as a social network is widely considered stagnant, or even declining in use, at least in the US. Although they paid large sums for these other two networks, they have brought crucial growth and relevance, which has supported its parent company.
It's not uncommon for startups to roll up their spaces by acquiring other startups ahead of an anticipated IPO or being acquired themselves.
Once startups prove a new market or product, they can face much bigger competitors moving in on them. By merging their forces, they can become much stronger and harder to dominate or run out of business.
Sooner or later businesses get to the stage where they see obvious advantages in controlling more of the chain in their industry. This may be for cost advantages and profit or control over quality, customer experience, and speed. Think about Amazon exiting deals with other last-mile delivery services and putting more of its own local vans on the roads. This may also apply to manufacturing, sourcing raw goods, distribution, and sales.
In highly regulated industries, it can take years to get some types of licenses. Some licenses are even extremely limited or only available through bidding at specific times. Think about insurance, banking, or marijuana, in which the rules can be different for every state. It may be much faster and more efficient to acquire companies that are already licensed.
To continue growth, many companies will need to expand geographically to new markets. There's a lot more to it than just using Google Translate to put your website in a new language. There can be big cultural differences and nuances that take years to understand. Acquiring existing companies that are already there, know the language, and have relationships and a footprint can be much more profitable and low risk.
Big companies aren't fast at innovating. It can be far more sluggish and expensive for them to test and grow new things than to simply buy something that a startup has already proven.
There are many economies of scale to be gained by merging companies. Both sides can benefit from lower costs, increased efficiency, and, in turn, more profitability.
Some smaller companies may have even stronger brands than their larger acquirers. Brands that have quickly gained brand recognition and love from customers can be great channels for larger ones. One example is Skype. Although the deal was positioned as an acquihire, it may have brought Microsoft a brand of communications much more attractive to many users than trying to develop their own.
Acquihires are a common way for other companies to acquire talent and ensure they have the best team in the industry or in a specific niche. If you are that good, they don't want to have to compete with you, and they definitely don't want you working for their competition. Given how much some corporations spend on recruiting, hiring, and onboarding, with few guarantees of success, buying your team may be a streamlined solution.
In some cases, M&A is about removing the competition. If you have a strong legal team that makes it look more expensive to try and sue you out of business and tie you up in court, or if it would take substantial capital risk to try to out-market you, then it may make more sense for them to buy you out than to compete against you. They can preserve those resources and their pricing to expand in other areas.
How do you know what is driving the buyer's motivation to acquire your company or engage in the process?
In some cases, it should appear to be relatively obvious, though you also have to be on the lookout for unscrupulous players who just want to peek inside your company or tie you up. The better you know their drivers and levers, the more strategic you can be in presenting and selling your company and the more you can strategically negotiate to keep what you want and gain better value and terms for the pieces you are willing to let go.
For example, if you know they really just want to secure a specific technology, then you may be able to exclude and retain a product or IP that you think is actually more valuable and keep focusing on building that. It may make no monetary difference to them, but millions to you. Or if time is of the essence for them and their own plans, then agreeing to a faster closing can be bargaining power to justify asking for more stock in the deal.
One of the most obvious tells as to what is driving interest is what type of entity the buyer is—a private equity, or hedge fund, or family office—which may indicate the company is a financial buyer.
Or is the buyer a large global corporation, existing operator in your space, partner, or customer, which indicates the company is acting as a strategic buyer? If it is Google, IBM, Oracle, Cisco, or VMware, it is probably looking at your tech.
Just ask: Why is the buyer interested in acquiring your company? What is its company mission and vision? How does this deal fit into it? What does it see as the benefits of parenting or merging your company with it? Just as in fundraising, when meeting with individuals in early talks, ask what the thesis is that they are presenting to those they report to, and have to sell the deal to, within their own organization.
Listen twice as much as you speak. What are the questions that the team members are asking? What are they focusing on in your business? What metrics, data, operation, or technological information are they most fascinated by? Is there any misalignment with their answers when you asked them?
What also might be driving them that they haven't announced? How do they react to certain statements you make about what you might do with parts of your business?
What is this company's track record for negotiations and M&A activity? Is the company a highly active acquirer that is great at closing deals? Or is the company brand-new to this and doesn't have an organized process yet?
If the company has been acquiring other companies, what has been the stated purpose for those deals? How has it played out post-acquisition? Has it left them as separate business units? Dissected them, pulled out the technology, and left the rest for scrap? Has it kept on founders and key team members or not? Has it often resold companies quickly or shut them down?
Just as when evaluating and vetting potential capital investors in your company, it is wise to speak with others who have engaged with the company in the past to get the inside scoop. Talk to others they've done this dance with before. If deals didn't complete, why was that? If target companies turned down big offers from this acquirer, why did the founders and their boards choose to say no?
Of the companies your potential buyer did buy, how did the founders feel the acquirer did at being transparent up front? What was the due diligence process like? Did the company keep its promises after the closing? What was it really like to merge? What happened to its startups when it started integrating?
Some general research may also hint at some of the buyer's motivations. What news is emerging about the company in the media? Have there been rumors of an IPO? Has it recently received sizable rounds of investment and acquired large amounts of cash to spend and put to work? What was the last round it raised, and when? Who participated, and what are their common strategies?
Is it obvious there are growth challenges for the company or competitors emerging ahead in tech or certain market segments? Is the company under pressure to quickly catch up?
Have big changes recently been underway in the market, future forecasts for the space, or the economy and methods of doing business?
Sites such as Crunchbase, LinkedIn, and Glassdoor may offer some interesting insights, too, such as recent hires, the direction of the company, reviews from previews, as well as existing employees or positions that have been closed.
These different types of buyers and motivations can greatly influence what's important to them and what you should be focusing on improving and presenting.
In the case of financial acquisitions, it is largely about revenues, cash flow, and profitability.
Particularly with leveraged buyouts, the acquirer must make sure the income is there to cover the debt service. The buyer needs a minimum return, though there can be improvements made in performance later. The buyer is looking at the value of the business as is.
For strategic acquisitions, the priorities are quite different. When Facebook bought WhatsApp for $22 billion, WhatsApp's model was revenue coming from just $1 per download. Facebook did away with that and the subscription model, making it free for personal users. More than anything, it is now the data that appear most valuable.
Strategic deals may target companies with no revenues at all, or at least very lean incomes and profits. It is far more about what can be done with the company, people, product, and technology once it is in their hands, as well as what the target company can do for its existing business.
The company may be able to take a zero-revenue business and turn it into a billion-dollar producing unit in almost no time at all. Or it can double its user base instantly. Or it can eliminate costs and competition, which dramatically increase the profitability of the new parent company. It may even be a move the acquirer sees as vital for its own survival.
Although they say that companies are bought, not sold, there is certainly a lot your company can do to make it appealing and essential to buy and maximize the perceived and potential value. By understanding what's driving the buyer, you are able to model and present the right forecasts that demonstrate how valuable the merger and deal can be for the buyer in the right circumstances.
This doesn't mean that you shouldn't be building a profitable business with strong revenues and cash flow, though there can be other factors that are more important to certain buyers.