Canadian SMEs Snapping up U.S. Companies

JOHN LORINC

December 3, 2013

More than five years after the 2008 credit crisis, Canadian M&A activity stubbornly remains well below its peak 2007 levels. But, while more sluggish than the feeding frenzy of six years ago, it does look as if acquisitions are starting to pick up the pace again according to new data compiled by investment bank Crosbie & Company. Over the past year, Canadian firms have been aggressively snapping up U.S. companies at much faster rates, culminating in 120 takeovers in 2013 worth almost $32 billion.

Crosbie & Company managing director Colin Walker notes that the proportion of Canadian acquisitions of U.S. firms as a total of all foreign acquisitions has fallen by about 10% to 15% in the past decade—proof, he says, that domestic businesses are increasingly operating in a "fundamentally international" market. "It shows that Canadian companies have recognized the need to push beyond [North American] markets over a long period. It's a function of globalization."

Walker says the Canadian M&A market is driven primarily by mid-sized firms with transactions worth less than $150 million. In a typical quarter, he adds, about 40% to 50% of those deals involve cross-border activity.

According to the 2013 Q3 report published in The Financial Post, the number of all year-to-date M&As—which came to an ominous total of 666—is 7% below the same period for 2012 and 11% below the first three quarters of 2011. "Despite weak activity," Crosbie & Company says, "the value of transactions increased by 9.7% to $49 billion in the quarter due to a few large transactions, particularly in the retailing and real estate sectors."

Crosbie also reports that the number of Canadian acquisitions of foreign firms is outpacing foreign takeovers of domestic companies by a ratio of 2.2 to 1.

Over the past decade, says Walker, this "outbound" acquisition activity has been driven by manufacturers looking to move production to low-cost jurisdictions in the southern U.S. or Asia. In other cases, such as Constellation Software, a Toronto firm, companies grow within key market segments by making strategic acquisitions.

In fact, Walker says most Canadian companies aren't just looking to boost their revenues or before-tax profits when they make an international acquisition. "They're buying that company because of the benefits that it brings, such as windows on new markets, new products, new manufacturing capability or some really good people."

The best mergers get the timing right

JACOLINE LOEWEN

There are many reasons for companies to acquire another business and merge it with their own. One type of mergers-and-acquisitions (M&A) strategy that’s popular with firms needing the new, new thing is to use it as a substitute for their own R&D.

For example, Vancouver-based Flickr, a photo-sharing application, was acquired by Yahoo Inc. for the reported sum of $35 million. Yahoo has in-house R&D but it recognizes that by acquiring unique technologies of startups such as Flickr, it can build market share quickly.

The objective for the M&A of smaller companies set by Yahoo in the Flickr case, or by other large technology firms such as Google or Blackberry, has been carefully defined. It is to supplement in-house R&D to remain on the cutting edge of their industries. John Banks teaches MBA students about M&A at Waterloo, Ont.’s Wilfrid Laurier University, and he reinforces the importance of identifying the purpose of buying a business.

“Regardless of how attractive the deal price or fortuitous the opportunity,” he explains, “it is essential that the impact the acquisition is intended to have on the firm’s strategic direction be both understood and realistic for the transaction to be truly successful.”

Companies that use the M&A process to supplement their R&D must have access to rigorous corporate finance skills in order to stick to their mandate. “The assessment needs to be especially meticulous,” Mr. Banks says, “since research shows that this particular aspect of M&A is often characterized by incomplete if not irrational thinking.”

A smaller firm is often attractive as an acquisition target because it can have the flexibility of a speed boat that manoeuvres rapidly around larger ships. “A company should challenge bigger companies,” says Amar Varma, founder of Xtreme Labs – which provides mobile experiences to firms – and who mentored Rypple and its acquisition by Salesforce. “There is the ability to think several strategies ahead of the larger company – a company should either be an opportunity as an acquisition, or a threat.”

The issue for a larger company choosing to use M&A to develop an innovative product pipeline is the risk of missing the window of opportunity to buy. “An early-stage company is rushing towards bankruptcy and they need cash to survive,” Mr. Varma explains.

Being acquired can alleviate that immediate pressure for cash but as he warns: “The larger company only has the window of opportunity to do an acquisition while a company is small enough to need the cash. Once the company gets to a larger size, it reaches a more stable scale and then it no longer needs the acquisition to grow further. It can go it alone.”

When a firm uses M&A to supplement its R&D, the corporate finance process needs to be highly streamlined and earmarked as mission-critical. An engineer who sold his company several years ago to a large U.S. firm, and who is still working at the large company to transition the technology, spoke anonymously about his experience. “It's estimated that approximately 70 per cent of M&As fail.

“For an M&A to work well, there needs to be strategic alignment for the bigger vision of the deal, an appropriate integration plan that minimizes day-to-day disruptions, and very importantly, alignment and consideration for the cultural fit of both companies.”

The first six months will be the most challenging, as the small firm is usually superior and this can cause resentment. The need for a cultural fit suddenly becomes startlingly clear. The on-boarding entrepreneurs will need a top executive in the firm to champion the acquisition and remind them of all the good reasons for the M&A.

“It becomes important to keep employees of the acquiree informed about what the M&A means for them – this can be a confusing time for acquiree employees who may feel their jobs are at risk and could consider leaving if they're not well-informed,” the engineer explains.

The engineer is satisfied with his decision to be acquired. “I do agree that an M&A can be a viable alternative to organic growth. For the company buying a business – the acquirer – their benefits in our case included immediate access to intellectual property, business and technical domain expertise in terms of talent, and also our customers.

“For my business – the acquiree – our benefits included gaining access to more R&D, as well as sales and marketing resources that accelerated business growth. Our M&A resulted in improved sales reach, cost optimization, and increased revenues.”

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.

8 Mistakes Entrepreneurs Make When Pitching To Investors

Rick Frasch,  

 

One of my grown children called me the other day to ask if I knew of anyone who could help review a business plan for a startup technology company. Rather than offer a referral to someone else, I thought it would be easier to provide some fatherly advice and craft the following list of 8 mistakes that entrepreneurs often make when pitching to investors. During the last 15 years living and working in Silicon Valley, I have been a partner in a technology venture capital fund and most recently an angel investor. Before that I was finance and M&A lawyer for 20 years. So I thought my “fatherly advice” would be well received. Imagine my surprise when I received this email the following day: “Dad, I asked you to introduce me to someone who knows something about startups, not give me advice!”

 

Rather than waste my carefully considered advice, I offer it instead to you:

1. The Elevator Pitch Is Longer Than One Minute 
 If your “elevator pitch” is longer than one minute, you will have a very difficult time raising money because you will not have enough time to make a compelling investment case. This opportunity will likely arise in an elevator, at a cocktail party, or ever so carefully wedged between small talk with friends and their acquaintances. So you must make the pitch short and to the point, and make sure it showcases your knowledge.

The only way to accomplish all of the above is to have a well-crafted pitch that takes no longer than a minute to deliver in an unhurried — but practiced — manner. Any longer and the potential investor will most likely have moved on either physically or mentally. Needless to say, this is not easy. You must be able to condense all of the information in your PowerPoint presentation (see 2 below) and business plan (see 3 below) into a brief summary.

2. The PowerPoint Presentation (aka “the Deck”) Is Too Long 
Professional investors, such as venture capitalists and serious angel investors, do not have long attention spans. The reason is not necessarily that they have attention deficit disorders but that they need to consider, evaluate, and choose among so many startup investment proposals that 30 minutes of uninterrupted time is all you can reasonably expect to have to present your proposal.

If you have been successful in the elevator pitch, you must be able to present a slide presentation in about 15 minutes, then leave time to answer questions within another 15 minutes (see 8 below). Although you may be granted more time, you must also prepare for the possibility of less time, so you need to ensure you get your main business points across before the investor conveniently excuses himself due to a “prior commitment.” Bottom line: 15 minutes of presentation means no more than 12 to 15 slides. 

3. Not Having a Factually Supported, Well-Written Executive Summary 
At the end of the day, the key to raising money is to have a carefully thought-out summary of the investment proposal (aka “the executive summary” or, the longer form, “business plan”).

When raising money, you need to interest VCs or angel investors with the elevator speech and PowerPoint presentation, but you only close on the money after the investor reviews, questions, and buys in to your entire business plan. So you must spend a significant amount of time drafting a coherent and persuasive executive summary or business plan that sets forth, among other things:

• the problem that the startup will be solving
• the size of the market the startup will be addressing
• a sustainable competitive advantage
• the expected revenues and costs of the startup that are supported by realistic and detailed assumptions and projections
• a description of the startup’s management team
• the exit for the investors (see 4 below)

The best elevator speech in the world will not result in any money unless you can deliver an analytical and believable business plan explaining how an investment in the startup will make its investors rich.

While there are a few experienced entrepreneurs out there who can do this in an evening, you should plan to spend weeks, if not months, perfecting a business plan — otherwise the time spent on the elevator speech and PowerPoint will have been wasted.

4. Overlooking a Realistic Exit Strategy for Investors 
An entrepreneur’s thinking process is often to make the world a better place, create a long-term business that will keep him or her engaged and richly employed, and bequeath a legacy that will take care of the entrepreneur’s children and their children. In contrast, the investor’s thinking process is usually “How do I make a lot of money in a short to moderate time frame (3 to 7 years)?” Guess whose thinking process controls whether the entrepreneur closes on an investment?

Therefore, you must ensure your PowerPoint presentation and business plan address how the investor will make money (aka “the exit”) from investing in your business proposal. Many entrepreneurs never address this basic need of investors. To avoid this oversight, you must be prepared to answer an investor’s questions about how the investment will be monetized through, among other things, licensing agreements with larger companies or a strategic sale of itself to a larger company, not just an IPO scenario in which you see yourself becoming CEO of a Fortune 500 company (something that almost never happens).

5. Asking for a Non-Disclosure Agreement 
Almost all entrepreneurs are convinced their business idea will result in enormous wealth and, therefore, is at risk of being stolen by an unscrupulous investor. So their first thought is to have the potential investor sign a “bulletproof” non-disclosure agreement (“NDA”). But for many professional investors, such a request is a non-starter, meaning there is no longer any reason to see the 12-slide PowerPoint or incredibly detailed business plan.

Unless the entrepreneur has a business idea on the order of “Son of Google,” most professional investors, including both VCs and serious angel investors, will not sign an NDA because they know that there is a strong likelihood that they will have seen the idea before and will likely see it many more times in the future. Consequently, they cannot sign a document that will surely lead them to a lawsuit in the future from either this particular entrepreneur or another one.

6. Submitting Investment Proposals “Over the Transom”
Raising money is all about building credibility with investors. No investor wants to invest in a deal that nobody else is interested in pursuing. Investors are very herd-like and often need the validation of others investing with them before they will “pull the trigger.”

Given the herd mentality of investors, you should never attempt to raise money by purchasing or collating a mailing list of VC firms or angel investor groups and then just mailing a proposal in the hopes someone will contact you to set up a meeting.

This is not to say that there are not many entrepreneurs who, in fact, do mass mailings. My point is that such an approach is likely to be D.O.A. Venture capitalists and serious angel investors are often deluged with unsolicited proposals, which sit in slush piles waiting to be opened. The only real reason they might be opened is because a friend or professional acquaintance has alerted the investor that the proposal deserves a read. In other words, someone has acted as a reference or provided a recommendation, preferably before the proposal has been delivered. Only then do you have a serious chance at receiving that special phone call.

7. Discussing Valuation Too Early On in the Negotiations 
The courtship ritual of most couples does not start with a discussion of how much each person will be worth seven years from their first date, and how it will be divided between them if and when they part. And neither should an investment presentation begin with a similar discussion.

The reason an entrepreneur often seeks an investment from VCs and experienced angel investors is to get a reliable indication of the value of their startup, which is what experienced investors do for a living. So there is no real point in preempting the process by insulting the VC or angel investor with an unwarranted starting point for a valuation.

As some would say, you should just “let nature takes it course” and wait for the investor to begin the discussion of valuation and pricing with a term sheet. Any other approach risks an early termination of negotiations.

8. Failure to Listen 
You need to “leave your pride at the door” when making an investment presentation and be open to the investors’ suggestions. The fundraising process can be grueling because experienced investors tend to ask numerous questions that likely have been posed to you before, questions that test your business model and technology platform so all parties might realize the best way of structuring an investment.

Most of the time, the questions are offered in the spirit of openness to justify the investment of such a large sum of money. But rather than viewing the questioning process as an exploration of alternatives by an investor who is obviously interested in the startup (otherwise why else would the investor have met with the entrepreneur in the first place?), some people reactively resist suggestions to consider changes to their business model or technology platform. Such a reaction is likely to cause a thoughtful investor to move on. You should instead take the time to consider the investor’s questions and suggestions, and view the process as useful insight into his or her thinking.

I end with number 8 because such a “failure to listen” was the chief mistake made by my own child. But I guess my own mistake was forgetting that children never listen to their parents either.