2019 was a highly acquisitive year for tech M&A with mega deals from some of the industry’s biggest players and far more deals from smaller, younger innovative companies. Acquisition of technology companies has been cited as the number one driver of M&A deals in 2019 by a recent Pitchbook article, with convergence and consolidation the most aggressive in the tech industry.
With no signs yet of tech M&A decelerating, many have begun to question the impact of a slowing economy. Interestingly, much analysis show that while M&A declined during the dotcom bust in 2000 and after the 2008 financial crisis, companies that made deals during a downturn ultimately saw higher shareholder returns than others in the industry. Tech Private Equity funds are growing in size so that forecasters determined that, together with strategic buyers, there is some $3 trillion in dry powder to spend on tech M&A. Also, these PE funds are being called down in a timely manner indicating that the capital is being put to work.
So, in these hyper-growth, hyper-competitive, hyper-fast markets, successful M&A still happens when sellers and buyers identify compatibility in real, tangible ways.
It’s no secret that M&A is difficult to pull off smoothly with so many pitfalls and mistakes which can be made. Based on my experience, I've found that there are several crucial steps required to achieve an optimal outcome for sellers and buyers. It all comes down to compatibility, specifically when considering the most relevant points: strategy, technology, integration, and finances.
Questions the seller and buyer should be asking:
Is it strategic?
For a successful M&A and an optimal outcome, there must be a strategic purpose from buyer and seller points of view. While every company will have differing strategic goals to accomplish with a deal, most companies choose M&A because they want to grow.
If two companies sharing this common strategic goal enter into a deal, both can capitalize on each other's resources to expand and grow into their desired markets, setting the scene for a successful M&A.
The key is that the strategy for M&A is a win-win for buyer and seller.
Are technologies complementary?
Following strategy, buyers and sellers should ensure there is not a significant overlap in their core technology offerings.
Often the key to success is to differentiate by market or segment. For example, if buyer and seller are targeting the same verticals in the SME, there will be significant overlap. However, if the buyer focuses on SME and the seller on large enterprise businesses, any technology overlap will be complementary and mutually beneficial.
During the preparation phase and again during due diligence, ensure any technology or product offerings add value rather than create unnecessary overlap, which provides poor economics for the deal.
Is there alignment with integration?
Of all the criteria I’ve highlighted, integration after the deal closes is the one that most organizations do not vet appropriately. As matter of fact, 53% of tech M&A does not meet expectations of buyer and seller because they lack a cohesive integration plan. After the deal closes, employees face a new reality in their day-to-day work, often resulting in a difficult and prolonged adjustment period. This impacts business even if there are a strategic fit and complementary technologies.
Successful integration requires planning, leadership and metrics to be continuously measured. Something I often recommend are ensuring both buyer and seller have common Objectives and Key Result goals. A good place to start with OKR’s is John Doerr’s “Measure What Matters”.
Is it a financial win-win?
Finding the optimal outcome for buyer and seller is key to setting the tone for the shared path forward. More often than not, the seller wants to maximize enterprise value while the buyer wants to minimize price. While everyone wants to end up with a little extra cash in their pocket, an optimal outcome must be achieved by both, buyer and seller.
If the deal is unbalanced, employees on the losing side may enter into the new relationship feeling slighted and less than enthusiastic about contributing to the joint company, a difficult beginning which will surely have an impact on productivity.
Successful M&A happens when buyers and sellers research their one another in meaningful ways as described above to produce an optimal outcome. Above all else, what is most important is that you're honest with yourself before committing to such a significant transaction and relationship.