“What’s the best way for a tech company to get acquired?”
“Build a great business.”
That’s what my Partner, Ned Hooper, used to say to startups when he was Chief Strategy Officer and Head of M&A for Cisco. Cisco basically wrote the playbook on how to grow a large technology company through acquisitions, acquiring over 75 companies between the period of 2002 and 2010, a period when Cisco grew revenue by almost 10% annually.
Ned is, of course, right that most of a CEO’s focus should be on building a sustainable business, which I, and many others, have written about. But given that the vast majority of exits in technology are, in fact, acquisitions (over 96% in 2013), and IPOs bring their own set of challenges, this post focuses on what it actually takes to attract acquirers. While technology companies tend to get bought, not sold, acquisitions also don’t “just happen.” So, “showing a little ankle” in the right way will help get you noticed by the right potential acquirers without you ever having to “sell.”
Regardless of whether you are thinking about exits right now, you cannot ignore the market. When the large strategic technology acquirers decide that a market is interesting from an M&A perspective, it can be tough to be the only company left standing when your top competitors have been bought by bigger players.
Just take a look at the recent consolidation around marketing automation. As Oracle, SAP, Google, IBM and Salesforce battle it out to build the best Marketing, Sales and eCommerce clouds, any company remotely in a segment that could be relevant should pay heed. Take email marketing, for example. In 2013 Salesforce bought ExactTarget for $2.5bn or ~ a 6x multiple on revenue. In the race to keep up, Oracle acquired Responsys in December 2013 at a ~7.7x multiple on revenue. In May 2014, IBM bought the last major one standing, Silverpop, for a mere 3x multiple on revenue. Who do you think had the leverage in that negotiation?. And countless was the number of email marketing players that have struggled since then or gone out of business entirely.
Social marketing is another example. In May of 2012, Oracle acquired Vitrue and then acquired Involver two months later. In July 2012 Salesforce bought BuddyMedia for over 7x revenue multiple. Google acquired Wildfire in August 2012 for a rumored 9x revenue multiple. At the time, Promojam, a leading social marketing company, vowed to stay independent. However, in 2013, they were forced to reinvented themselves and pivot away from enterprise customers, which had been their bread and butter, to focus on less profitable SMBs.
So, if you are that great business, what can you do to increase the probability of a favorable acquisition? The following are 5 simple axioms that every founder or CEO, in my opinion, should keep in mind:
- Be ready for market consolidation
I encourage CEOs to really try to understand the uber trends in the broadest definition of “their market,” especially as seen from a large company’s perspective. Start from the customer budget, not from your product, and figure out what tradeoffs and choices customers are really making in order to buy from you. This includes understanding your competition in a more nuanced way, not just who you see in RFPs but who the leaders are in adjacent or overlapping market segments. If those companies are acquired, it might preclude the acquirer from purchasing you, as they have already made their bet in the broad market segment.
- Explore “strategic” partnerships
Acquirers do not buy businesses that they have never heard of. And they take time to get to know you well enough to buy you. I have found that starting high level business development conversations with large players who have indicated interest in your market is an easy way to get on their radar. But truly figure out for yourself what the advantage of partnering is and be focused in your discussions, so as not too waste too much time if discussions do not lead anywhere. Who knows, you may, worst case, end up with a new channel or commercial relationship that expands your business and increases the chances of remaining independent, or that enables you to be sure an acquisition is “the perfect home”, like in the case of RightSignatures recent acquisition by Citrix.
- Don’t create showstoppers
Don’t do anything that would preclude you from being bought including (but not limited to) inadequate protection on IP, technology choices that do not fit the architectures of large acquirers and unconventional or onerous capital structures. Do not accidentally pollute your code by using open source in the wrong way as you try to get your release out quicker. Do not cut corners to settle litigation because you think no one will sue a little guy like you. And do not build on Ruby or .Net if all the large players in your market use Java, unless you have an exceptionally good reason to that creates advantage. Just like you make choices that you hope will scale as you grow, acquirors need to buy companies that they can integrate and scale with minimal investment.
- Know who the decision makers are
In every large tech company, there are those that drive acquisition decisions, those who support them, and those who are the internal champions – the people who really want the acquisition to happen. The balance of who leads – corporate development, the business or sales owner, or a technical evangelist – is different at each firm, and likely, you will have to convince all three. So figure out who they are and what are their goals and motivations – both corporate and individual. Then, find stakeholders – like your investors or board members – who know or can introduce you to those folks. Touch base periodically to tell your market story and to start positioning your successes. As Dan Porter, CEO of OMGPOP which Zynga acquired for almost $200 million said, it’s “not just being known, but who in the company knows you” that is key.”
- Write the RFP and make someone a hero:
Even after a strategic acquirer has decided to make “a move”, someone, likely the internal champion, has to go through the process of writing a plan and gaining support within the company. So write the plan for them – the market rationale, the build vs buy analysis that of course leads to “buy,” and then the “why you.” Be specific and show how you help THEM achieve their goals. This is not a bad strategic exercise to go through anyway within your company, and worst case, you have simply educated a potentially important ally on your views of the market and your position in it.
Clearly, you are busy running your company, and talking to the customer that will help you make your quarter will always feel like a higher priority than having a high level dialogue with a corporate development exec. But even customers want to know that they are buying into a company that thinks strategically, is relevant in the marketplace and will be around in some form over the long haul. So, if you want to look more like a WhatsApp than a PlanTech, (yes, you have never heard of them), then start by taking a proactive approach to positioning yourself for acquisition. If you look back in three years, laughing as you enter the room for your Q3 public earnings call, it will have been well worth it!