An acquisition can make or break your startup.
At worst, a disastrous deal leads to wasted wasted time and money, a startup's two most precious resources. On the flip side, a strategic transaction can give a speed to market advantage over rivals or potentially let you run away with a new market. Take IBM’s recent purchase of RedHat to accelerate hybrid cloud adoption, or Salesforce’s acquisition of Mulesoft to coordinate, unlock, and integrate customer data better than any competitor.
But the M&A landscape is also littered with examples of failures...Google and Nest, Yahoo and Tumblr, eBay and Skype. I could go on.
As a former M&A attorney and serial SaaS founder myself, I’ve experienced acquisitions from every point of view. What I’ve learned is that true due diligence requires more than a scan through boxes of contracts and reviewing the balance sheet. In fact, the most successful deals take a combination of careful research, emotional intelligence, and attention to commonly overlooked details. So if an acquisition opportunity ever comes across your desk, make sure to consider the following before signing the dotted line.
Make sure you’re buying the core underlying technology (and the full rights to it), not just the company licensing the technology.
In 2005, eBay spent $2.6 billion on Skype, which it hoped would increase sales on its platform by giving buyers and sellers an instant communications channel. When Skype failed to take off among eBay users, most people assumed that was the reason eBay put Skype for sale four years later (taking a $936 million write-down in the value). But there was a little known fact complicating the situation: The purchase didn’t include full ownership of Skype’s underlying technology-- a mistake Microsoft was sure to avoid when it bought the company along with the IP a few years later.
Always always always check to make sure you have clean rights to the an acquisition target’s technology. I know the paperwork can be painful, but it will be so worth it in the end.
Communicate with all shareholders, even those with a small stake.
When Yahoo was about to buy my first startup, Dialpad Communications, we met surprising resistance from an unlikely source. An investor, who had written off most of his stake in Dialpad many years earlier, thus indicating that the company was worth close to zero to him, suddenly had his own ideas. As the deal was about to close, I called him to say, “Great news! You’re about to make millions off of the investment you wrote off years ago. All you have to do is sign this paper.” I expected gratitude and cooperation, but apparently my lack of communication about the negotiation process was not appreciated, and the investor put a higher dollar value on his share. Looking back on it, I shouldn’t have expected champagne corks and flowers so soon. A deal isn’t over until the ink is dry.
Every M&A deal throws curveballs. You can mitigate the consequences someone else’s potentially irrational self-interest by having conversations early on. That way, you’ll buy yourself more time to negotiate tricky requests and help shareholders understand what they’re getting.
Don’t underestimate the value of chemistry and culture.
Sometimes companies are so blinded by the potential for technology synergies and market growth from a merger that they fail to take into account something obvious — the people. One of the most notorious examples of a post-M&A culture misfit is the 2005 merger of Kansas-based Sprint and Nextel. Conservative Sprint executives clashed with scrappy Nextel personnel. A Nextel managers’ meeting illustrated the dynamic perfectly: The Nextel CEO wore khakis and shouted “Stick it to Verizon!,” while his Sprint counterpart, wearing a suit, gave a PowerPoint presentation. Lack of chemistry affected the ability to effectively integrate in other ways and ultimately forced the Sprint CEO to resign.
My current company, Dialpad (I bought back the name after selling Dialpad Communications to Yahoo! in 2005), recently acquired TalkIQ, a leader in the artificial intelligence and machine learning, and our shared culture and values have been a key factor to the success of this deal. Months before the acquisition, we were working together as partners and during weekly engineering meetings we found the two teams naturally worked as one. This made sense, as TalkIQ’s CEO had worked side by side for years with my co-founder to oversee the massive growth of Google AdWords, remaining close friends after they left Google to pursue other career opportunities. You can’t put too fine a point on how important shared chemistry and culture are.
Good acquisitions aren’t easy to pull off. There are a host of things that lead to failure — financial losses, stock drops, lost market opportunities, fizzled dreams. Being prepared for all the possibilities, and knowing about the various snags that might arise, will increase the likelihood of a win.
For more on this topic, come see us at SaaStr Annual on Thursday February 7th at 2:30 p.m. You can register for our session below.