You Don’t Have to Be a Tech Company to Be a Tech Company (Part 3)


“Digital transformation marches on. Tech and non-tech companies alike are being disrupted by innovative digital technologies and are turning to M&A in search of solutions.” – EY Global Technology M&A Report: 3Q 2016

In Part 1 and Part 2  of this “You Don’t Have to Be a Tech Company” series I discussed how every company today has to become a technology company and how every industry will be “digitally remastered.”

Mark Raskino and Graham Waller of Gartner Group relate the consequences of this “remastering” in their book, “Digital to the Core”:

“Your company, and many others in your industry, are facing a future in which digital technologies will become integral parts of your products and services – not just in the marketing of them. If you don’t make that happen, someone else will.”

Well, it is happening.

And it’s happening in “fast-motion” – 2x, 4x, 8x, 16x….infinity!

Pay attention to this trend of digital technology becoming an integral part of your core products or services….or you will miss it…until it stampedes all over you and crushes you into road kill.

The Evidence

In Q3 2016, the value of technology companies acquired by “non-tech” buyers rocketed to $55 billion, which is higher than 2015’s full year total of $53.6 billion.

In other words, in the last 3 months the value of tech companies acquired by non-tech acquirers was greater than all 12 months of last year’s value of tech companies acquired by non-tech acquirers.

As Donald Trump might say, “this is a movement.”

At $93.2 billion of tech companies acquired by non-tech companies through the first nine months of 2016, non-tech acquirers of tech companies are 74% ahead of full-year 2015 – this represents 27% of all 2016 aggregate global tech M&A value.

[1]

In fact, CB Insights reported just last week (15 Dec 2016) that:

“Non-Tech Acquirers Are Suddenly More Common Than Tech Companies in Deals For $1B+ Startups”

This is astounding news. The chart below shows the 8 non-tech companies that have acquired a venture capital-backed U.S. “startup” in 2016 YTD for $1 billion or more, vs only one tech company acquirer (Cisco).[2]

CB Insights commented: “…the make-up of buyers appears to be shifting as incumbents across industries ranging from consumer packaged goods to auto to insurance buy into venture-backed companies.”

EY’s research as documented in a recent November 2016 report supported this very trend when it assessed all technology company acquisitions as a whole:

“Technology is in such a state of rapid evolution, and tech and most other industries are so deep into disruptive digital technology transformations, that buyers know they can’t wait for markets to smooth themselves out. Instead, tech dealmakers – whether tech incumbents, non-tech buyers or PE – seem to be watching for the opportunities that market volatility sometimes creates, and are ready to make deals when it does.” [3]

The Disruptive Past Isn’t Over. It Just Goes On and On.

Most executives are generally aware of the disruption that technology has wielded over the years on so many traditional industries: music, newspapers, travel agencies, books, transport and photographic film, for example.

However the disruption we have witnessed in these industries over the past 10-15 years is not finished. Some would argue it’s just getting started.

For example, in the last financial quarter (Q3 2016), newspaper companies’ revenue continued to get hammered.

In Q3 2016, The Wall Street Journal, part of News Corp’s Dow Jones division, suffered a 21% decline in ad revenue.

The New York Times, Financial Times, Gannett (which owns USA Today), and Tronc (which owns the LA Times and Chicago Tribune), all suffered similar declines.

Gerry Baker, Editor-In-Chief of The Wall Street Journal, commented on the continuing consequences of disruption from technology:

“The fall in advertising has been much faster this year than anyone had expected.” [4]

So the already crippled industries who have been infected over so many years by technology disruption continue to attract wounds and battle scars.

From here it only gets worse; not only for the already disrupted industries, but also for those industries that are about to get royally disrupted, potentially even more painfully and swiftly than the industries that were vulnerable to disruption during the genesis of digital technology many years ago.

Many non-tech growth-focused companies are starting to feel the pressure…they are starting to see the inevitable reality of their predicament.

These forward-thinking companies (think Netflix not Blockbuster), are making changes…they are becoming technology companies…and they are acquiring technology companies.

You Can Acquire Your Way Out – But There Are Bumps In The Road

What is becoming the core driver now of these technology company acquisitions by non-tech companies?

Raksino and Waller of Gartner sum it up well in “Digital to the Core”:

“Over the past twenty years of IT advancement, most businesses have changed everything but the product. Even if they now possess advanced, Internet-enabled business models, they are actually making and selling pretty much the same kind of products they were making in 1994. Changing the product is the final step, and the biggest shock of all. Internet-connected and embedded digital functions will become a part of your product and the value your customer buys. This value may represent 20%, 40% or 60% of what the customer acknowledges and pays for.”

As companies embed more and more digital and Internet-connected functionality into their core products, they inevitably create more value, guard against disruption and enhance the customer experience.

Indeed, several of these growth-focused companies will become disruptors themselves.

Acquiring a technology company – the right technology company – accelerates this value creation and prevention of being disrupted. It accelerates the enhancement of the customer experience.

When you get a technology acquisition right, then it can transform your business. It is a game-changer.

What’s a taster of this potential game-changing transformation that can come from acquiring a technology company?

Listen to the CEO, Alexa Von Tobel, of seven-year-old startup LearnVest, which was acquired by Northwestern Mutual for a reported $250m in 2015[5], describe the postacquisition culture of the company a year after the acquisition:

“The really exciting thing about bringing together a 106-year-old company and a seven-year-old data-driven, fast-moving start-up is the chance to create a third culture, which makes innovative, data-driven decisions, and does them at scale. I think it’s going really, really well so far, because our core values are completely aligned.” [6]

As a growth-focused company, when you acquire a technology company you can achieve at least some or all of the following:

·       Create new products and services (that would not otherwise be possible)

·       Produce a higher quality of goods

·       Improve inventory turns

·       Reduce costs

·       Squeeze more productivity and efficiency from your assets

·       Make your customers a lot happier than they were before

·       Get some really talented and able new staff

However, before you get too carried away with the potential transformational benefits of acquiring a tech company, one has to note that acquiring a technology company can be very tricky, with a lot of moving parts.

Acquiring a tech company is not like buying a house or an oil field or a factory.

It’s more like buying a Formula One team – think engine, driver, tyres, weather, equipment, fuel, design, pit crew, track, other drivers, manager, tech support staff – and then mix it all up together.

If you don’t have your act together on each of the individual disciplines as well as on the overall web of disciplines seamlessly interconnecting with each other, then forget it – you will lose. No point even trying.

Same with acquiring a tech company. If you go about it in an ad hoc or opportunistic or unplanned manner then forget it. You will fail.

In fact, there are probably 1,000 ways a technology acquisition can go wrong.

If you do get it wrong, then it will cost you millions and millions of dollars (or euros, pounds or yen), and months and months, and sometimes years, of painful undoing.

The Good News – There Is A Science To It

The good news is that there is a science to acquiring a technology company – a science we call Techquisition™.

There are 12 essential steps to the Techquisition™ method of technology company acquisition. These steps – when properly executed – will help any acquirer to create and retain maximum value from a technology company acquisition.

I describe below, in brief, the 12 steps of the Techquisition™ method, which you can deploy to acquire the right tech company to create more value, guard against disruption and enhance the customer experience:

1.    QUALIFY – In the initial and critically important step of Techquisition™ – “Qualify” – you will want to thoroughly assess and sense check your strategic imperatives against the industry and market trends, the competitive environment and your positioning in it, the capabilities you need, customer demands and the evolving technological landscape. Take the time to review your board’s decision and specifications to acquire a technology company; ideally you will confirm the consensus opinion and specifications via a third party adviser.

2.    SEARCH – In step 2, “Search”, you will want to undertake a comprehensive global search to identify all the potential available target companies in the world that fit the specification determined in the Qualify phase. Leave no stone unturned. Assume nothing. Use every resource available. Saving nickels and dimes in the Search step can cost you millions in the end, particularly if you acquired a company that was less than the ideal company because you didn’t find the company that you should have acquired. Your perfect target is out there. Find it.

3.    DIAGNOSE – In step 3 of Techquisition™ – “Diagnose” – you should review and analyze the candidate target companies identified in the Search phase against a long list of criteria, including company size, profitability, growth, geography, competitive positioning, quality of product/solution, protected IP, scalability of the IP, potential fit (strategic and operational), management team, likely valuation range, shareholding, relationships with your networks and your advisers’ networks, etc. Don’t assume too much or discount companies too early in the Diagnose step – you don’t know what you don’t know, until you start making calls and getting the real scoop.

4.    TARGET – In step 4 – “Target” – you will want to review and discuss the target companies from the Diagnose phase, assessing not only the traditional “pros” and “cons”, but also critically asking the questions internally of each candidate target company “What makes this target company special? What makes it special for us? Why? How well does it fit into our ecosystem?” If you’re not sure of the answers to these questions then go get the answers – make the calls you need to make to collect the intel you need to inject into the discussion. Once you’re satisfied that you have the answers you need to the critical questions above, then rank and prioritise the target companies. Create a shortlist of the most appropriate companies to contact in the next step.

5.    CONTACT – Step 5 – “Contact” – is when Techquisition™ starts to get interesting. For each candidate identified as a priority target in the Target step you will want to create a bespoke script (the Chalk Talk™ script), based on what was determined as “special” about the target from the Target phase. This is when you can start to leverage your network and your advisers’ networks of relationships to contact the right people at the target company and articulate the opportunity to them via the Chalk Talk™ script. If you get traction with the target company then you’ll want to arrange for NDAs to be signed and obtain additional critical information on the target company.

6.    ENGAGE – Step 6 of Techquisition™ – “Engage” – is when the process starts to get real. This is when you start to spend serious time and money on the project, which is why Step 1 (Qualify) is so important.

(Unless you are from Step 1 committed to achieving a successful, game-changing result from Techquisition™ then there is little point going through the “expensive” Engage phase – it would be like paying for a joy ride in a private jet rather than paying to go in that jet from point A to point B as quickly and as productively as possible).

In the Engage step, after having further qualified the target company from the Contact step, begin a dialogue between your management team and the target company management / founders and/or shareholders. Your best line (vs staff) executives should lead the discussions, if possible. Identify the target’s key staff early (which often will not include the CEO) and build a relationship with them. This is the stage at which the “culture check” begins. Initial meetings can be informal, but craft a specific agenda for more formal meetings between the key staff of the target company and your management. Ensure that you are still engaging simultaneously with several target companies from the shortlist in the Target phase as “beggars can’t be choosers” – ie sometimes no matter what you do, even after increasing the price, you can’t get what you want, so you have to decide if you can still get what you need. Keep more than one door open.

7.    VALUE ASSESS – Step 7 of Techquisition™ – “Value Assess” – is when you start seriously considering making an offer for the target company. After the initial meeting(s) with the target company and further qualification after each meeting or call during the Engage phase, then you can prepare an indicative valuation of the target company, including its IP and talent assets, and also an analysis of the strategic fit, including the pros and cons of a transaction, a risk analysis and the risk mitigation actions. Note that fast-growing innovative companies attract a crowd and can be snapped up quickly by other bidders. Lead from the front; don’t find out the bad news the hard way.

8.    VALUE RETAIN – Many acquirers focus early in the process on the value they can “get” rather than the value they can “retain” after the acquisition is complete. This would be a mistake. Step 8 of Techquisition™ – “Value Retain” – aims to eliminate this problem. Assuming a target company still qualifies for a formal acquisition approach after the “Value Assess” step, the culture fit decision must be made. Often it’s “no fit, no deal”. With tech companies culture can be everything.

Beyond assessing culture fit you can qualify and confirm four additional key success factors to achieve a “Bleed-Free™” acquisition:

(a) can the target’s key talent be retained and if so how?

(b) can full ownership of the target’s IP be secured and can all IP rights be protected?

(c) will the target’s customers genuinely be happy with this acquisition (why and, specifically, how?) and

(d) will our customers genuinely be happy with this acquisition (why and, specifically, how?)

9.    OFFER – Getting to this step 9 – “Offer” – can take a lot of time and effort (as steps 1-8 of Techquisition™ do require time and effort). But it is worth it. Based on (a) the outcome from the “Value Assess” and “Value Retain” phases, (b) any timing constraints you and the target company might be facing, and (c) your available alternatives to acquiring the target that meet the specs (from the Qualify phase), you can now draft the conditional offer to be made to the shareholders of the target company.

Ensure that the offer leads with a thorough articulation of what has inspired your approach to the target company. This is critically important, because the vendor(s) often form a view on your offer and decide for several different reasons, not just “money”. The decision makers are human, not robots, and humans are emotional beings, so make the emotion count. Use emotion to your advantage. If you are motivated and sincere, and note that a modification of the original Chalk Talk™ might still apply here, then you will be welcomed with open ears. Include why you are so excited about the business combination and the strategic fit as well as the benefits you see for the target company stakeholders. Remember in tech company acquisitions the “why” can often matter more than “price”.

10.  AGREE – Negotiation is the essence of step 10 of Techquisition™ – “Agree”. We believe it is by far best to make your offer during a physical face to face meeting with the vendor(s), but we know this is not always possible. So, if your offer is not made during a meeting with the target company, then after sharing your offer with the target (usually via email and/or video conference or conference call), then plan a meeting (which does not need to be called a “negotiation” meeting) regardless of the target company’s response to your offer. You’ve made it this far, so be sure to keep talking, and realize that there is almost always more than one way to skin a cat.

Before your meeting, or otherwise during the meeting, above all seek first to understand, imparting as much “pre-suasion” as possible before you enter detailed discussions. (Note that agents can be quite helpful here). Negotiation of a tech company acquisition is all about agreeing the package of value and terms, not just about agreeing “price”. Price is just one of many terms, and many of them can be as equally important as “price”. Negotiate with power first and foremost. Always start with power. Default to creativity if necessary as a supplementary or supporting mechanism. Most negotiators start with reason, but we advise using reason only as a last resort, and only if you are certain it will help.

11. CLOSE – After you have negotiated the terms and formally agreed the package of terms (via a binding Letter of Intent or Heads of Terms etc that includes exclusivity arrangements), then you have entered step 11 of Techquisition™ – “Close”. To close the transaction you will want to initiate confirmatory due diligence and documentation of the final definitive agreements.

Many executives forget to ensure well in advance of the Offer step that all their supporting team members (ie your advisers) are in place to support you in the Agree and Close phases as appropriate. Preparation is everything. Your advisers include financial advisers, legal, accounting, commercial, tax, insurance and PR advisers. Regarding announcements, ensure that any deal announcement (which often happens at the Agree phase) is discussed and agreed by both you and the target company to avoid disagreements and misunderstandings before you have even closed the transaction. In fact this is a good proxy for how to operate and manage expectations going forward in the merged companies – communicate early and often. Whenever in any doubt, communicate.

12. LEVERAGE – So after 11 well-earned steps of Techquistion™ the deal is finally closed. But does that mean your job with Techquisition™ is complete? No, the post-completion action plan of a tech company acquisition is critical to remaining Bleed-Free™ and to creating shareholder value, particularly for the first 100 days and particularly for those targets that you intend to integrate with your core operations. Step 12 of Techquisition™ – “Leverage” – is when it all comes together.

The subject of “People” might not have been the most important value element during the first 11 steps, but it certainly is among the most important value elements post-completion. You’ll want to ensure early on in the process (usually by the Offer phase) that you have the proper post-completion supporting mechanisms in place. Usually the most effective of these mechanisms is employing a specialist post-completion consultant, particularly one that has a very strong competency in “People” and IP and significant experience in tech company acquisitions. Leverage this consultant, as well as the selected staff on your team and the key staff at the target to make the magic happen.

So that’s it – the essential 12 steps of Techquisition™ – successfully completed. You have an acquisition that is about to transform your company and deliver outstanding results in creating more shareholder value and guarding your company against disruption.

I can understand if this Techquisition™ method might feel a bit overwhelming to achieve as an organisation. However the result for you as an acquirer can be truly phenomenal. Creating results like this is why you’re in business. No pain, no gain.

The truth is you’ll probably need a partner or adviser to help you with the Techquisition™ process, whether it’s us or someone else.

If you’d like to know more about how to use the Techquisition™ method then just reach out to me and my team directly at contact@aquaapartners.com and we’ll be happy to help.

Remember, every company is going digital now and that means you. Get it right. Play it safe. Use the Techquisition™ method.

Your board and shareholders will be glad you did.

To Your Success in our Exciting, Brave New World,

–        Paul Cuatrecasas, Founder and CEO

Aquaa Partners

“We enable growth-focused companies to create more value and guard against disruption by acquiring the right tech companies.”

paulc@aquaapartners.com

www.aquaapartners.com

[1] EY Global Technology M&A Report:3Q 2016

[2] CB Insights, “Non-Tech Acquirers Are Suddenly More Common Than Tech Companies In Deals For $1B + Startups”, 15 Dec 2016

[3] EY Global Technology M&A Report: 3Q16

[4] Financial Times, “Wall Street Journal slims to tackle falling ad sales”, 16 Nov 2016

[5] RIABiz, 1 April 2015, “The real reasons Northwestern Mutual paid a reported $250m for LearnVest”

[6] McKinsey&Company, “How a culture survives when a start-up merges with an incumbent”, November 2016

By |2017-08-20T20:30:41+00:00December 21st, 2016|Uncategorized|14 Comments