M&A Strategies

Our metrics: 14,207 subscribers (+329 w/w)

IPOs make waves in the news, but in reality they are few and far between when it comes to the range of venture backed outcomes. Startups are much, much more likely to either die or get acquired than make it to IPO. Like 99% more likely.

So today we’ll breakdown how to evaluate your acquisition landscape.

TL;DR: Why might a company want to acquire you? To…

Theory: Spread your overhead and serve the combined business with one back office, while creating logistical synergies and better negotiating leverage with suppliers.

Example #1: Jet Blue buys Spirit Airlines and can now use the same airport crews and back office staff. They have more leverage in their business model and can realize “efficiencies” (fewer people, fewer terminals, better fuel rates)

Example #2: The combination of Volkswagen, Audi, and Porsche allows all three companies to share some platforms. For example, the VW Toureg, Audi Q7, and Porsche Cayenne are all based on the same underlying platform.

Theory: If you buy your competitors, they are not your competitors any more. Become the only game in town by buying up all market share. Then control prices.

Example #1: Draft Kings and Fan Duel attempted a merger which would have created one massive betting platform, and basically the only live betting “game in town” in many states.

Example #2: Few realize that John D. Rockefeller’s middle name was “Dmonopolies”. In the 1800s he became the world’s first billionaire with a 90% market share of the US oil industry through Standard Oil. The company literally bought out everyone with an oil spicket. Eventually, though, the US Supreme Court ruled that Standard Oil had to be broken up into dozens of other small companies.

Strategy: Moving into a tangential market presents opportunities for your salesforce to cross sell and upsell new products to both your existing customers and the target’s.

Example: #1: Broadcom, a chip producer, bought VMware, a cloud computing and virtualization company. Now they can upsell and cross sell VMware’s portfolio, technology they previously couldn’t offer. As a serial acquirer (CA Technologies, Symantec) they’ve bought their company a second (fourth?) act.

Example #2: IBM pursued this strategy to get into the software business. Between 2010 and 2013, IBM acquired 43 companies for an average of $350 million each. By pushing the products of these companies through IBM’s global sales force, IBM estimated that it was able to substantially accelerate the acquired companies’ revenues, sometimes by more than 40 percent in the first two years after each acquisition.

Up until now, employers have held all the benchmarking cards. You could call it information asymmetry.

We’re changing that.

If you are pursuing a Finance role at a Seed through Series D Startup, we can help.

Mostly equity generates a customized benchmarking report for your specific scenario in 7 simple questions.

Strategy: Owning multiple layers of the product delivery cycle allows you to abstract value at multiple stages. A company's acquisition of a supplier is known as backward integration. An acquisition of a distributor or retailer is called forward integration.

Example #1: The merger of Live Nation and Ticketmaster in 2010 created a vertically integrated entertainment company that manages and represents artists, produces shows, and sells event tickets. Perhaps most importantly, the combined entity manages and owns concert venues, while also selling tickets to the events at those venues.

Example #2: In 2002 eBay bought PayPal to own both the marketplace and the transaction layer. It also bought out a competitor in the process, admitting they couldn’t build the same quality product internally.

Strategy: Setting up a legal entity and cutting through bureaucratic red tape is always a pain, with unique frustrations depending on what geography you are entering. Sometimes it’s easier to buy an existing operation who’s gone through the headaches of establishment.

Example #1: Uber bought Careem in Dubai to move into a new country market. It’s easier for them to buy up a ride sharing hub that’s already fought local regulatory battles and hired drivers rather than start from scratch.

Example #2: Procter & Gamble’s acquired Gillette to create a global company. P&G had stronger sales in some emerging markets, Gillette in others. Working together, they introduced their products into new markets much more quickly.

Strategy: This is commonly referred to as an “acqui-hire”. In this case the employee’s skillsets are the asset, and any revenue the company generates is secondary. This is common in software where developers have specific skillsets. Sometimes the company being bought is experiencing financial difficulties, and selling out to a larger rival is seen as the only viable way out (no revenue, no product, just specific talent that can be repurposed for another mission).

Example #1: Over the course of the last decade, Google has acquired over 30 artificial intelligence (AI) startups. Most are pre revenue, acquired for the tech they’ve built so far, and more specifically, the talent.

Example #2: When Google wanted to develop a social media service to rival Facebook and Twitter, they didn’t headhunt the best people for the job; instead, they bought Milk, and gave the entire workforce the objective of developing Google+.

Strategy: This strategy prioritizes the asset’s potential over the current company’s revenue or talent. Examples of rare assets include customer lists, distributor agreements, land rights, and intellectual property.

Example #1: AstraZeneca acquired Alexion Pharmaceuticals for $39 billion for it’s portfolio of treatments for rare immune diseases. Alexion was one of the only companies treating these diseases.

Example #2: Texas-based EnCap Investments has bought up the mineral rights to the Texas Permian shale basin. I like to picture a rigid suit knocking on the door of a small ranch in the middle of nowhere and and handing a man in cowboy boots a suitcase with $10 million dollars in cash.

Strategy: This is the “buy” outcome of the “build vs buy” decision. Many times tech firms will know what product they want to add to their platform, but either don’t have the time or team to execute immediately. Buying a company with a jump start allows you to reduce tech risk (can you build it?) and purchase progress so a market opportunity doesn’t pass you by.

Example #1: Apple knew it wanted to play in the automated voice assistant space. So it bought Siri in 2010 and then Novauris Technologies, another speech recognition technology, to piggy back on the progress it was making with Siri.

Example #2: GitLab acquired Gemnasium to accelerate its security roadmap, helping it add vulnerability detection to it’s developer platform faster than building from scratch in-house.

Strategy: Acquiring and merging multiple smaller companies in the same industry and consolidating them into a large company allows the larger firm to combine revenues and operational costs. This strategy is most common in highly fragmented markets with local players. It requires a big bankroll.

Example #1: Beginning in the 1960s, Service Corporation International grew from a single funeral home in Houston to more than 1,400 funeral homes and cemeteries in 2008.

Example #2: Clear Channel Communications rolled up the US market for radio stations, eventually owning more than 900.