Killing the Golden Goose

Why do companies make acquisitions?  Acquisitions are risky, expensive and distracting.  Isn’t it better to license a product, rather than buy the company that makes it?  This is the conversation I had over dinner last night with the founder of a security software company.  We were both attending the RSA conference, which after more than a decade remains the most important security technology event in the world.  The company licenses a product from a small technology company.  The company is the biggest channel for the product.  At this point, the smaller partner acts like a division rather than an independent entity.  All of their development efforts are in response to product management guidance that comes from the bigger partner.  All of their revenue comes from the bigger partner.  And, they would really prefer to be acquired.  They propose the idea monthly, and it is shot down.  The reason is simple: the later partner is worried about screwing up the culture and motivations of the acquisition target.  With money in their pockets they will be less incented to please the buyer, and will be working for salaries rather than equity value.  The two companies are stuck in a dance that may never end.

But now that the larger company is considering M&A, they have no choice.  They will have to control the IP that is driving their growth.  Otherwise the buyers will do a simple end-run and purchase their partner for a fraction of what it would take to buy them.

How do you make this happen?

My advice in this case was simple.  It needs to be a structured deal, with large incentives for achieving specific milestones. And in this case the most important milestone is to institutionalize the technology – to truly bring it in house.  This is a big job that everyone would rather avoid – but at this point they have no choice.  They have to start thinking like a big company, with their eyes further down the road.

Posted by , on 26 February 2014
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