Agile Equity: Press
Practical Counsel on Technology M&A - Developing Mergers and Acquisitions Strategies
At NewYork.com - June 29, 2001
By Ben Boissevain, Agile Equity, LLC
The single most important event in a company's history is often the sale of the company to a strategic partner. Yet many companies neglect to develop a well-structured mergers & acquisitions ("M&A") program. Technology companies in particular will benefit from an M&A program given the massive and rapid consolidation in the technology sector.
It is prudent in such volatile times for technology companies to develop an M&A strategy, even if companies are not actively pursuing transactions. The following counsel should be beneficial in developing an M&A strategy.
Timing
When considering selling, many companies wait far too long to explore their options. Despite the tight capital markets, technology companies often attempt to raise capital until they hit the wall. In developing an M&A program, companies should realize that the typical M&A process takes three to six months to complete.
If an undercapitalized company is successful in attracting a buyer in a short time frame, the leverage of the seller is substantially diminished during the negotiation process. Many buyers try to change the key economic parameters of the deal at the end of M&A process knowing full well that the seller often has the option of accepting a substantially reduced valuation or bankruptcy.
Many healthy technology companies miss the window of maximum shareholder value. For example, Company A possessed an interesting server-based application that was in strong demand by portals. Unfortunately for Company A, Yahoo already purchased a similar company for $50 million. A month later, Excite also purchased a similar company for $30 million. Company A, late to the game, achieved a valuation of only $10 million due to a diminished number of potential acquirers. The laws of supply and demand rule the M&A market. Being the last competitor to sell almost guarantees a lower valuation. A company should monitor the M&A market and if competitors begin to sell, seriously reevaluate its strategic options.
Positioning
In developing an M&A program, a company should reassess its positioning in the marketplace. In 1999 and 2000 most early stage technology companies, funded with successive rounds of venture capital and preparing for an initial public offering, focused on horizontal markets and providing "end-to-end" services. This is necessary for a company with the goal of an IPO, since the public markets prefer a company that has the potential of dominating its space. However, buyers in the M&A market often prefer to purchase companies with traction in key vertical markets, financial services for example, and a niche product or service that can be bolted on to the acquirer's current corporate structure. Repositioning a company can substantially enhance its reception in the M&A market, and hence improve its valuation.
Valuation
Companies need a valuation and, more importantly, a solid, justifiable rationale for such valuation. The majority shareholder of Company B insisted that his interest was worth $20 million. When the shareholder was asked his valuation rationale, he indicated he needed to pay off a mortgage, pay capital gains tax, and still have $10 million net. While such personal financial planning issues are important to the shareholder, an acquirer is only interested in a fair valuation based on the stock market valuation of comparable public companies and the price other acquirers have paid for comparable private companies.
It is important to realize that the last round of venture capital financing is not a sound basis for determining the valuation of a technology company in the M&A market. The valuation in the M&A market is based on the demand for such companies from potential buyers versus the supply of similar companies considering a sale. Preparing a valuation and valuation rationale that has credibility is essential prior to approaching the M&A market.
Structure
The structure of a transaction is often far more important than the valuation. For example, a major shareholder in Company C sold his company to an Internet company for mostly stock. Unfortunately, the shareholder neglected to realize the importance of a two-year lock-up clause. At the end of the lock-up period, the Internet company's shares had declined precipitously in value.
Another key term is whether a transaction is an asset or stock sale. In an asset transaction, the company must pay taxes on the sale of assets to a buyer and then distribute the proceeds to shareholders, who are once again taxed on the distribution. Double taxation has a substantial effect on the net proceeds for a shareholder. Structural issues such as cash or stock consideration, the lock-up clause, and an asset or stock sale are key for shareholder value.
Negotiation
A detailed negotiation strategy is essential in achieving the best deal terms. A seasoned investment banker doesn't over-negotiate a deal, but rather concentrates on two or three issues that must be resolved, thereby having a good sense of the practical versus the unimportant. Developing fallback positions is also critical for a well-constructed negotiation strategy.
Finally, it is important to know who has final authority. Company D's CEO negotiated with a subsidiary of a major NASDAQ listed company. Unfortunately, after months of negotiation, the CFO of the subsidiary's parent company, who held final authority, canceled the transaction. Knowing who holds final authority is necessary in any negotiation.
It is imperative that technology companies develop an M&A program as an integral part of a long-term strategy. Years of hard work and millions of dollars are at stake. *Ben Boissevain is a managing partner with Agile Equity, LLC, an investment bank that specializes in Mergers and Acquisitions in the technology sector.