Using M&A To Build A New Product.

Using M&A To Build A New Product.

Many view mergers & acquisitions as a strategy intended to expands companies existing footprint/product lines, diversify, or realize costs synergies. M&A is less frequently viewed as  a method to build entirely new products.

Google’s new Pixel smartphone is an excellent example of a company using M&A to develop a new product. In a mid-October blog post, PitchBook.com highlights “8 strategic acquisitions behind Google’s Pixel“.

Starting in February 2015 Google (Alphabet) made at least 8 strategic acquisitions/investments in companies with smartphone-related technology. 

The acquisitions include NimbuzCloud a provider of cloud-based storage for consumer photos and videos, Skillman & Hackett a company that developed virtual reality painting studio and other art applications, Lumedyne Technologies which designs and develops sensors used in consumer electronics, Speaktoit (also known as Api.ai) which developed a platform offering natural language interactions for devices, and more.

While initially, it may have been hard to understand how some of these acquisitions helped Google’s existing business, the acquisitions now make a lot of sense knowing Google was developing its own smart device.

The resources Google acquired in these acquisitions likely cost less than in-house development. These acquisitions were also all made in the last 2 years thus accelerating Google’s development of its own smart device.

If you are developing a new product, have you ever thought of acquisitions that could get you there faster for less capital? Did you make an acquisition? What were the results?

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

 

MBAs Figured Out The Secret To Entrepreneurship (hint: acquisitions).

MBAs Figured Out The Secret To Entrepreneurship (hint: acquisitions).

When most people think of entrepreneurs they envision young techies with game-changing business ideas and plans to go from zero to $1 billion overnight. What most people don’t think of is the hard work, long hours, stress, and failure rates.

Well, leave it to the MBAs to figure out a way to achieve entrepreneurial success faster, easier, with less stress and higher success rates. What’s their secret? Search funds!

Search funds have been around since the 80s but really started to grow in popularity after 2010. Aa search fund is basically a mini private equity fund whose goal is to acquire a small operating business and accelerate its growth.

I recently saw an article in the Harvard Business Review discussing how, for new MBAs, search funds have become increasingly popular. Rather than take the traditional consulting or investment firm route, MBAs from top schools see search funds as a fast track to being the CEO of a small, profitable business.

While HBR focuses on search funds vs. traditional careers, I think there is also a similar comparison to be made for traditional entrepreneurship vs. growth through acquisitions.

The biggest hurdle of a search fund is the upfront work/stress required to raise a fund, identify and then close a quality acquisition. After that, it’s basically just like most high-level jobs except you get to make your own business decisions and directly benefit from the improvements you make to the business. The same goes for most small businesses growing through M&A — financing and sourcing quality deals is usually the most difficult part.

While high early stage obstacles, with long-term rewards, is the idea of growth through acquisitions, HBR points out that, with the traditional MBA path, getting the job is easy and thriving at a chosen career is the difficult part. (see chart below)

w160318_ruback_angstover1-850x607

In my opinion, a chart similar to the one above can be made to compare traditional entrepreneurship to growth through acquisition. As many of the entrepreneurs reading this know, gaining initial traction usually takes longer, cost more, and is much more stressful than initially anticipated (while starting a business is relatively easy).

In the last few years, I’ve seen an increasing number of entrepreneurs attempting to replicate the search fund model but there are still far more entrepreneurs going at it the old fashion way. Maybe MBAs actually do learn something in business school 😉

 

Spitting Watermelon Seeds.

Spitting Watermelon Seeds - Entrepreneur

The other day I saw a post on LinkedIn by Ryan Holmes titled: “3 Worst Entrepreneurial Habits Revealed (by a watermelon)“.

Holmes tells the story of a friend who spent time living in a Canadian village accessible only by plane. Because of the distance, food prices in the village were very high. One day a watermelon arrived in town and the shopkeep placed a $85 price tag on it.

$85 was a lot of money for the people in the village. The community members came up with a solution; cut up the watermelon and sell it in individual pieces so everyone could have some and share the cost. While the community members’ solution seemed logical, the store owner refused to cut up the watermelon. Eventually, “the rare and precious fruit was left to rot on the shelf, unbought and uneaten“.

Holmes say this story shows “three of the worst entrepreneurial bad habits converge: inertia, ego and fear“. He then goes on to detail each bad habit. It’s a great post and I suggest any entrepreneur give it a read.

You can find Ryan’s post on LinkedIn HERE

In the comment section, a LinkedIn user asked; “why no one decided to buy the watermelons themselves and sell them in parts.

This user’s comment highlights the most valuable lesson from this story – good ideas are a dime a dozen but the ability to execute is rare.

The town’s people all thought the shop owner should cut up the watermelon and sell it in pieces but no one wanted to take the risk and/or put in the effort to do it themselves. No one executed!

Some might be surprised at how often I speak with different management teams with nearly identical business plans. While some succeed, others don’t and failure is usually not because of a lack of good ideas. I’m also guilty of thinking of “great ideas” only to never do anything about them and later see an article in TechCrunch or VentureBeat about someone who is executing on my idea. Success or failure isn’t a result of the quality of an idea, it is a result of the quality of execution!

So, if all you have is a great idea and no execution, you are just spitting seeds…


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Acquisitions By MicroCaps Aren’t The Problem…

Acquisitions By MicroCaps Aren't The Problem...

I recently read a blog post titled “Why Do Most Acquisitions by Microcaps Destroy Shareholder Value?“. The author points out that “50-90% of all mergers and acquisitions fail to meet financial expectations” (a statistic some considered to be skewed by unrealistic expectations, billion dollar M&A blunders, and a lack of data on lower market M&A).While it’s very true that many M&A transactions fall short, I disagree with the author’s implication that most microcap acquisitions directly destroy shareholder value.  

I would argue that M&A actually increases a microcap’s chance of success. In fact, the author writes “Even though M&A is rarely successful, the irony is that some of the biggest microcap success stories had disciplined acquisition strategies“.

A few examples of successful microcap acquirers include; 1. Middleby Corporation, 2. MTY Food Group, 3. WPP plc, and 4. Cisco Systems. While the list goes on, and I don’t know the exact statistic, I would guess that over 50% of public companies that grew from a valuation of less than $50M to over $1bn grew through M&A. 

Those familiar with microcaps, or small businesses/startups in general, know success is extremely rare. While M&A failure is pegged at 50-90%, we can’t forget that the rate of failure for startups is very high and it’s even higher for microcaps!

There is no absolute formula for value creation (or destruction). Saying most acquisitions by microcaps destroy shareholder value is akin to saying most microcaps in a specific industry or with management teams of a certain pedigree destroy shareholder value. 

So what reason does the author give for his statement that “Most Acquisitions by Microcaps Destroy Shareholder Value”? Well, he lists 5; 1. Quality, 2. Equity Dilution, 3. Acquisitive Management Teams Using Equity, 4. Large “Transformational” Acquisitions Using Equity, and 5. Too many Too Fast Using Equity. 

In short, the author is saying that most acquisitions made by microcaps fail because most microcap management teams are unqualified and lack the discipline required to execute an M&A strategy (or any strategy). And on that point, I couldn’t agree more! 

What do you think? Is “Most Acquisitions by Microcaps Destroy Shareholder Value” a fair statement? Are there better ways to grow a microcap than M&A? 

Keep an eye out for my next post on this topic where I will discuss ways to overcome the 5 reasons most acquisitions by microcaps destroy shareholder value.  


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Where Do M&A Valuations Come From?

Where Do M&A Valuations Come From?

When speaking with acquirers I often ask, “how did you determine the purchase price?” Answers range from “that’s what the seller was asking” to complex valuation models and analysis.

I see a lot of M&A transactions. More often than you might think, I come across very similar deals with very different valuations. For example, two acquirers can be looking at manufacturing companies with nearly identical financials and business models but one buyer is valuing a target at 10 times the other. How is it that two nearly identical companies can have extremely different valuations?

Sometimes the higher valuation is derived from the value of future synergies or growth potential but more often the higher valuation is a result of an underqualified buyer.

In previous posts, I have discussed how to properly value acquisitions with a focus on smaller M&A transactions. For those of you working on larger acquisitions (or looking for more detail), I want to share the Pepperdine University Private Capital Markets Project.

“The Pepperdine private cost of capital (PCOC) survey was originally launched in 2007 and is the first comprehensive and simultaneous investigation of the major private capital market segments. This year’s survey deployed in January 2016, specifically examined the behavior of senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately-held businesses, investment bankers, business brokers, limited partners, and business appraisers.”

While the 2016 report has a lot of great information, the parts I find most interesting are the sections where industry professionals are surveyed about valuation. Private equity firms and public companies usually acquire private companies and do so with the help of investment bankers, lenders, business brokers, and others, all of whom were surveyed.

So, according to the dealmakers of 2016, where do M&A valuations come from?

Well, investment bankers say the average EBITDA multiple for companies with $1MM to $4.9 MM in EBITDA is 5.3X,

Average M&A EBITDA multiples.

adjusted EBITDA is the preferred multiple for private equity buyers when valuing targets,

Private Equity Acquisition Multiples.

and revenue multiple is the preferred multiple valuation method of venture capitalists.

Venture Capital Valuation Methods

That’s just a quick glimpse of the treasure trove of information included in the 125-page report. With all kinds of great information for companies growing through M&A or raising capital, I suggest most of my readers check it out.

You can download the full report HERE.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Tech M&A Mania Hits Waltham.

Tech M&A Mania Hits Waltham.

Yesterday, Cisco announced it would acquire Waltham-based CloudLock Inc. for $293 million. Having graduated from  Bentley University, I have a special connection with Waltham. Waltham has become a hub outside “the hub” for tech companies. Home to companies like Constant Contact, Actifico, Carbon Black, Cryptzone, and Boston Dynamics watch city could consider tech city as its new nickname.

Since 2008 CloudLock has raised $35 million, the latest round being $6.7 million in Nov. 2014. With $35 million raised and a $293 million sale price, this acquisition should provide great returns to investors.

When compared to Microsoft’s  $26 billion LinkedIn acquisition and SalesForce acquiring Demandware for $2.8 billion, Cisco’s acquisition of Cloudlock is just a blip on the radar for recent tech M&A.

With tech M&A heating up and big ticket prices being paid for tech companies, many in Silicon Valley are beginning to feel better about their unicorn bets. I still see it being a difficult road out of Silicon Valley for unicorns but, at least, the recent tech M&A frenzy proves there are plenty of buyers looking for tech companies with “reasonable” valuations and modest financing histories.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Pros & Cons Of Converting Micro-Cap Debt To Equity.

Pros & Cons Of Converting Micro-Cap Debt To Equity.

It seems like more and more small investment firms in the micro-cap space are looking to convert third party debt of micro-cap public companies into equity. Most micro-cap CEOs probably get calls every day with offers to “restructure their debt”, “clean up their balance sheet”, “convert their old debt to equity”, “eliminate liabilities”, etc.

Using  rule 144 and/or the exemptions available under Section 3(a)(9) or 3(a)(10) of the Securities Act, investors usually create free trading stock quickly by eliminating an issuer’s debt. While there are instances where converting debt to equity can be truly beneficial for an issuer, the majority of micro-cap debt to equity conversions leave issuers worse off than before the restructure.

So when does converting micro-cap debt to equity make sense?  In my opinion, debt restructures are most helpful for revenue generating companies who can use cash, that would have been used to pay debt, to fuel growth. For pre-revenue companies,  a debt restructure tends to be a much riskier proposition.

Below, I break down the Pros & Cons Of Converting Micro-Cap Debt To Equity.

PROS:

1. Repurpose Cash Flows – Revenue generating companies can repurpose cash flow to fuel growth. Income that would have been slated to pay liabilities can be used for other purposes. By reducing or eliminating payables for things like inventory, marketing, R&D, and general admin, a company can temporarily increase available cash flows from operations and use those cash flows to fund growth.

2. Maintain Creditor Relationships – Converting liabilities into equity allow issuers to maintain a strong relationship with creditors. Meeting obligations to creditors (including investors, lenders, suppliers, and service providers) allow for continued access to those credit sources.

3. Speed – When creditors need to be satisfied quickly, converting debt to equity tends to be one the fastest options. With no registration statements, no extensive underwriting or due diligence, and “boilerplate” legal documentation, investors in these transactions can fund in as little as a few days with minimal upfront costs to the issuer.

CONS:

1. Little Value Creation – Debt to equity conversions usually do little in the way of creating traditional value for micro-cap issuers and their shareholders. Maintaining a strong relationship with a key creditor or supplier can be important and beneficial but the costs often outweigh the benefits.

2. Poor Reception – Investors usually view these transactions as a last ditch effort by management. Some of the standard debt to equity terms can be discouraging to market investors and future direct equity investors. With little value creation and less than ideal terms, market support for newly issued (primarily free trading) equity tends to be limited.

3. Temporary Solution – These transactions usually don’t solve long-term cash flow and/or financing problems. Rather, they tend to hamper an issuer’s ability to raise future funding and don’t provide a path to satisfying the same creditors in the future. Additionally, satisfying older liabilities, that may not have required immediate payment, only increases short-term dilution without solving the issuer’s short-term business or financing needs.

In short, converting debt to equity can be a useful tool but it is often used in the wrong situations, by the wrong companies, for the wrong reasons. In my opinion, these types of transaction best serve revenue producing companies and do more harm than good for pre-revenue micro-cap issuers.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

NASDAQ Sending Mixed Signals On Cannabis.

NASDAQ Sending Mixed Signals On Cannabis.

On May 23, MassRoots received word that its application to list on the NASDAQ had been denied. It is understood that MassRoots’ application was “denied by the exchange on the grounds that MassRoots may be deemed to be aiding and abetting the distribution of an illegal substance“.

For those of you not familiar with MassRoots, the company is “one of the largest and most active social networks for the cannabis community with 6255,000 users.” As the FaceBook of cannabis, MassRoots does not ‘touch’ actual cannabis.

While there are a number of cannabis related biotech issuers listed on the NASDAQ, the exchange seemed to make it clear that; “as long as marijuana is federally illegal, neither NASDAQ or the New York Stock Exchange is going to list a company related to recreational marijuana.” Or it was clear, until Microsoft, one of the largest companies listed on the NASDAQ, announced Thursday that they were entering the cannabis business!

Microsoft is teaming up with Kind Financial to “acquire government-facing contracts for seed to sale tracking“.  Seed to sale technology is designed to track cannabis from cultivation (seed) to final purchase by the end user (sale).

seed to sale
BioTrackTHC “The Seed-To-Sale Tracking System”
This news obviously doesn’t make Microsoft a “marijuana company” but it certainly puts it into the cannabis business. For an exchange concerned about “aiding and abetting the distribution of an illegal substance”, I would say having one of its largest issuers tracking the cultivation, harvest, production, and sale of cannabis may be considered aiding and abetting. 

As of now, MassRoots is appealing the NASDAQ’s decision and has requested a written explanation of the denial.The National Cannabis Industry Association and ArcView Group also submitted a pretty interesting  “Statement of Support of MassRoots’ Appeal” to NASDAQ.  

In the written appeal, NCIA and ArcView point out that the standard of aiding and abetting the distribution of an illegal substance is very vague. They go on to ask;

Is every power company that provides electricity to marijuana cultivation operations aiding and abetting? What about Google that shows people where to buy marijuana? Is Facebook liable for the tens of thousands of illegal drug transactions that likely occur over its network on a regular basis? The Denver Post and New York Times have publicly accepted advertising dollars from the cannabis industry – are the owners of those publications also banned from listing on Nasdaq? Several local and national banks traded on national exchanges have accepted regulated cannabis businesses as clients and conduct marijuana-related transactions on their behalf, could those banks also be perceived as aiding and abetting?

We probably won’t have a clear understanding of why MassRoots’ application was denied until we see the written response from the NASDAQ. It is also possible that MassRoots was denied for not meeting the NASDAQ listing requirements. In the meantime, cannabis companies looking to list their securities are welcome on the OTC Markets and Canadian Exchanges. I wonder if the NCIA will amend their letter to add tech giant Microsoft to its list of NASDAQ companies aiding and abetting the cannabis industry…

What do you think?

Will Microsoft’s new venture will help with MassRoots’ appeal? Is it unfair that NASDAQ is turning away tech startups in the cannabis space while allowing tech giants to remain listed and enter the industry?  Feel free to share and comment.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Start-Up Acquires Start-Up.

Start-Up Acquires Start-Up.

With LinkedIn getting most of the social media attention from the tech/finance people lately, I have an interesting story about Twitter to share.

An article on BostInno discusses “How 1 Tweet Turned into Dave Balter’s 1st Startup Acquisition“.  Dave Balter, founder of Mylestoned – a startup that is “reframing death through the transformation and discovery of dynamic, meaningful, digital memories” (think Facebook style memorial pages for deceased loved ones) tweeted at Eric Owski to set up a meeting in San Fransisco.

Start-Up Acquires Start-Up.

Owski founded a start-up called Heirloom that allows users to “easily and beautifully digitize your paper photos”. With over 100,000 users, Heirloom has significantly more users than Balter’s newly unveiled company. Not only did Heirloom have a lot of users but those users were the exact kinds of users Mylestoned was trying to attract. Both companies purpose was to preserve the memories of loved ones.

Fresh off a $1.5 million raise, Mylestoned closed its acquisition of Heirloom on June 1st (terms were not disclosed).  While we don’t know the terms of the deal, I have a feeling it was far less expensive to acquire Heirloom (and its 100,000 targeted users) than it would have been to acquire those users from scratch (not to mention the very cool and synergistic Heirloom technology) .

In my experience, synergistic start-up M&A transactions like this aren’t considered enough by founders. I often encounter management teams that are focused on building their business from the ground up and underestimate the value that can be created by acquiring other start-ups or small businesses.

Are you a start-up considering growing through acquisitions? What kind of value can a start-up or small business bring to you company? Please feel free to comment and share!


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

In M&A, You Get What You Give.

In M&A, You Get What You Give.

A piece in the June 2016 issue of the Harvard Business Review titled – “M&A: The One Thing You Need to Get Right” states that;

“Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.”

The author, Roger L. Martin, uses examples of large companies using “acquisition[s] to enter an attractive market” stating that they are “generally in “take” mode” and thus fail. Prof. Martin points out that, acquisitions made by companies in “take mode”usually fail to earn a return because “the seller can elevate its price to extract all the cumulative future value from the transaction”.

So how exactly does and acquirer “give” to an acquisition? The author highlights four ways an acquirer can “give” or “improve its target’s competitiveness”.

1. Be a Smarter Provider of Growth Capital – Martin provides three examples of ways acquirers can be better providers of growth capital. 1. By acquiring smaller companies and funding their growth in a way that the capital markets don’t (good in less developed capital markets), 2. By bringing intellectual capital and growth resources, and 3. “facilitate the roll-up of a fragmented industry in the pursuit of scale economies“.

2. Provide Better Managerial Oversight – Another way to “give” is “to provide [a target] with better strategic direction, organization, and process disciplines“. He highlights examples of acquirers who have struggled and succeeded noting that “Better management is more likely to result from PE buyouts“.

3. Transfer Valuable Skills – The third way to “give” in an acquisition is “by transferring a specific—often functional—skill, asset, or capability to it directly, possibly through the redeployment of specific personnel.” Martin uses the example of PepsiCo acquiring Frito-Lay and transferring “the skills for running a direct store delivery (DSD) logistics system—a key to competitive success in the snack category”.

4. Share Valuable Capabilities – Rather than transfer skills as discussed above, the fourth way to “give” is to share. A good example is Procter & Gamble who shares its customer team, media buying capabilities, and even its powerful brand in some instances.

In my experience, acquirers often look at targets thinking; how will they help me enter a new market, access new customers, scale my technology, etc. Those acquirers tend to accept higher valuations from sellers, thus overpaying for future value that the target is going to add (or might add) to the business.

When I work with acquirers who have plans to improve the target (not use the target to improve the acquirer), they tend to negotiate better deals and have greater long-term success with less pressure for the acquisition to be a game changer for the acquirer’s business.

Are you and acquirer? How do you plan to improve your targets? 

 

Read the full article, “M&A: The One Thing You Need to Get Right“, on HBR.org; HERE .


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.