I assume this is the meat that everyone wants to hear about :). Hopefully you have read part 1 and part 2 first and if not you should, but please do keep in mind that I am not an expert at these matters, this is my opinion and I have written this with a Southeast Asian audience in mind. There are people with much more experience than I who have written on this subject.
Unfortunately there is no magic bullet to making an acquisition happen and ensuring it happens. There are many pitfalls and hurdles on the way to closing a successful acquisition and selling your company is definitely an art. While there are a few people who are really good at it, for most success is going to be due as much as anything to lots of luck, hard work and perseverance.
Gain an acquisition sponsor
First, for an acquisition to happen at a valley giant, someone within the company, the acquisition sponsor, is going to have to really go to bat and put their neck on the line and tell their CEO that your company should be acquired. As discussed, this is going to be much easier to do if you have already partnered with the valley giant, but courting and securing this sponsorship is critical.
You need to assess and evaluate your company and its fit with the valley giant and determine the best way to position yourself to potential acquisition sponsors. You also need to minimize the risk and potential hurdles that the sponsor may encounter when evaluating your company – anyone of which can trip things up and kill an acquisition. When evaluating your company and positioning, here are 5 topics that need to be considered and evaluated – note some of these may seem to be quite obvious, but these are still going to be reviewed and assessed and so you need to make sure your company’s position is as strong as possible:
- Be in the same business: Most of the valley giant’s resources (sales, marketing, product and engineering) are focused on their core market, the company knows these markets and most people in the company will have an understanding of the companies weaknesses and gaps. Being in the same business and filling a real gap for the valley giant for a very strong argument internally.
- Fill a market gap: Most valley giants have a list of adjacent markets they want to expand in to but have not had the resources to do so. They also have existing markets where they feel they have weaknesses and where they need a stronger presence to protect themselves. Offering a solution to filling either of these gaps is a very compelling and, to an MBA trained executive, very logical and justifiable. Keep in mind that these gaps may be technology, products, verticals and geographies.
- Make the business really easy to integrate: This should go without saying, but it needs to be easy to understand how to integrate your business into theirs. The main challenges usually come down to technology/product and sales models, but the revenue part of the acquisition business case will be based on incremental revenue from integrating your business and product into theirs. Generally this is based on selling your product through their existing global sales force, but whatever the case, the integration needs to be simple to understand and with as few risks as possible – the better you can structure your business for this the higher the likelihood of an acquisition happening.
- Have good code: You are in the same business, are filling a gap and have an easy to integrate business, but if someone “lifts up the hood” and finds spaghetti code, duct tape and next to no infrastructure, there is a very high risk that the deal is dead in the water. The valley giant engineering team is going to need to take on the code and responsibility for supporting it, if they don’t think it is good then the first thing that they are going to say is that the product and code are throw away and need to be rebuilt. The next question is then going to be why buy the company if you need to rebuild the product? All of these engineering teams have coding, security, uptime and scalability standards that must be adhered to – your code needs to be up to scratch. Note, if you are Friendfeed or Octazen and Facebook wants your engineering team and not your product this does not matter, but then again in this case your code is probably exceptional.
- Know and minimize your skeletons: Everybody has liabilities, in the US it might be patents you don’t have access to, in Southeast Asia you may not have a license to the content you use and may have “borrowed” it. For the legitimate rights holder, it is not worth legally pursuing a small company for damages, but once a valley giant takes ownership with their large balance sheets the incentives change… Know your skeletons – list them up front and don’t be shy about sharing them, most of these can be worked through before the deal is closed. But if the valley giant gets 2 months into the process and a sponsor has backed the deal and then finds a major skeleton that you should have known about and may have been hiding, there is an immediate loss of trust and a feeling of lost time and money. So get your paperwork in order ahead of time because Sarbanes-Oxley generally requires everything to be in order….
Starting the acquisition discussions
Assuming that you have now successfully partnered or at least developed a good working relationship and secure an acquisition sponsor, you need to get those acquisition discussions going. Again, I have not actually sold a company, but I can share the key rationales and perspectives the valley giant is going to take into consideration when doing acquisitions. Basically you need to position yourself as being essential to the future success of the valley giant, and make them understand that not acquiring your business will put them somehow at risk. Here are some key justifications for this:
- You are a critical component in their product, service, technology or some other part of their business and the loss of that component will put their business unnecessarily at risk
- A competitor acquisition of your business or not owning your business (think Yahoo! not acquiring Google or Facebook) will put the valley giant at too much of a disadvantage due to scarcity of comparable businesses or the partnerships you have
- Acquiring your business will lead to a large increase in sales or a user base that cannot easily be gained elsewhere
- Your company has assets, such as people, intellectual property or physical assets that are scarce or of great value to the valley giant
Again, there are other ways to position yourself as an acquisition target and I am sure that there are many examples, but these are the ones that I am most familiar with.
Let’s take a look at a couple of real examples, Maktoob and Citizen Sports, both of whom were acquired by Yahoo! many years after they were founded. I was not personally involved in either of these acquisitions nor did I have access to confidential information so the following comments are based on information I knew from blogs and other external sites.
Maktoob was the Middle East portal, providing email and content services for people in the Middle East. Both Yahoo! and Maktoob had gaps in their sales coverage; Yahoo! did not have a sales force or a product for the Middle East and Maktoob likely did not have much of a sales force outside of the Middle East. This made it a natural fit for a market/sales gap that Yahoo! had. I am assuming the checks on Maktoob product confirmed that it was well engineered and as a portal had a similar design, sales model and operations to Yahoo!’s and that there were no major skeletons. This made the deal very easy to justify.
Citizen Sports was a leading social sports product that complemented Yahoo!’s existing fantasy sports and sports news sites (same business) but helped Yahoo! in social, an area that Yahoo! has still not really figured out. This was a product gap and the deal was likely a product driven acquisition. It helped to cover social and the apps space and confirm Yahoo! has a leading online sports destination. Yahoo!’s sales team had the relationships to sell any newly generated inventory and it is a fair assumption that Citizen Sports had good code and no skeletons. Another easy deal to justify.
Of course, valley giant do acquire early stage companies for their technologies and products, but these are harder to manage and make successful as a valley giant is not setup to shepherd and grow small companies into success within their organization. The risks are higher and the likelihood of failure is higher (think Dodgeball and Deli.cio.us). However, if the acquisition price is low enough these deals can fall within the 5% of incremental budget that companies invest internally on new initiatives each year so you never know…