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.

When Acquisitions Become Drivers of Innovation

 

In the world of technology, companies are increasingly moving beyond growing organically and using acquisitions to enlarge their operations. Some have also made a strategic decision to acquire R&D rather than try to grow innovation in house.

Take for example Apple’s acquisition this summer of Toronto-based Locationary, the venture-backed startup that specializes in location data.  According to a number of market experts, this deal allows Apple – which has its own R&D division – to immediately augment its mapping service so that users can access up-to-date information on local businesses.

Whether the acquirer is Apple, Google or Blackberry, the objective in these acquisitions must be carefully defined. That’s the view of John Banks, who teaches MBA students about M&A at Waterloo, Ontario’s Wilfrid Laurier University. “Regardless of how attractive the deal price or fortuitous the opportunity, it is essential that the impact the acquisition is intended to have on the company’s strategic direction be both understood and realistic for the transaction to be truly successful,” Banks says.

Enterprises that use M&A to supplement their R&D can approach acquisitions in a passive or active way. Those doing a formal search process tend to have access to strong corporate finance skills and are able to apply rigorous valuations and criteria for potential deals. Banks agrees with the value of using specialized expertise: “The assessment needs to be especially meticulous since research shows that this particular aspect of M&A is often characterized by incomplete if not irrational thinking.”

A smaller company is often attractive as an acquisition target because it can have the flexibility of a speed boat that manoeuvers rapidly around larger ships. “There is the ability for a small company to be nimble and to not be hampered by bureaucracy. They can do R&D at a quicker pace and without legacy products,” says Amar Varma, founder of Xtreme Labs, a Toronto-based provider of mobile solutions to businesses. (Varma coached BumpTop prior to its acquisition by Google in 2010.)

The issue for a larger company that chooses to use M&A to develop an innovative product pipeline is the risk of missing the window of opportunity to buy. If the targets are very attractive, they will be acquired. Google bought YouTube and capitalized on gaining a unique business while it was still available in the market.

A common impetus to enter acquisition mode is when the larger company is looking to grow by boosting a product or service offering. Once the target has been identified, it’s all about timing.

Says Varma: “Startups are continually looking for cash. The ability for a startup to obtain cash through customers or investors can significantly impact the upward trajectory of the deal price. This means the acquirer must purchase a startup at the optimal time – before there is too much competition to buy. Often, there is no demand until there is demand.”

When a company uses acquisitions to supplement its R&D, the corporate finance process needs to be highly streamlined and focused on its mission. “In order for an acquisition to go 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 consideration for the cultural fit of both companies,” says Haroon Mirza, entrepreneur in residence at OMERS Ventures and co-founder of CognoVision, which was acquired by Intel in 2010.

The period immediately after the acquisition can be challenging, particularly if the small enterprise bought for R&D development has a superior product, as this can cause resentment by the acquirer’s team of employees. The need for cultural fit suddenly becomes startlingly clear. The on-boarding entrepreneurs will need a top executive at the acquiring business to champion the buy.

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

Mirza was satisfied with his and his co-founders’ decision to have CognoVision acquired by Intel. “I do agree that an M&A can be a viable alternative to organic growth. For the acquirer, benefits include immediate access to intellectual property, business and technical domain expertise in terms of talent, and also our customers.

“For the acquired company, benefits include gaining access to significantly more resources for R&D, sales and marketing which can accelerate business growth by means of improved sales reach, cost optimization, and increased revenues.”

Jacoline Loewen is a director at Crosbie & Co. Inc., a provider of advice to small and medium-sized businesses. She is also the author of “Money Magnet: How to Attract Investors to Your Business.”