Interviews

A view to an exit: Being acquired

7 min read

02 March 2014

Facebook’s recent acquisition of WhatsApp for $19bn sent ripples through the tech community and for good reason. For Facebook, it looks to be a wise move with analysts predicting that its acquisition is well on its way to securing a billion users. However, the real winner is WhatsApp.

The deal was worth an impressive $4bn in cash and an additional $12bn in Facebook shares. In terms of an exit, Jan Koum, CEO of WhatsApp, has struck gold.

However, not everyone creates a billion user business and receives an offer from Facebook. The key to negotiating and securing a successful business acquisition is to begin with the end in mind. Knowing what acquirers are going to expect from you and your business from the outset is essential. For your business, the keyword here is growth. Potential buyers will be scanning your business for ways to ensure long-term success. However, there are of course many different ways a business can grow and by identifying which avenue a prospective acquirer has in mind you can place your company in the best possible position.

There are generally four types of strategies to scale a business: market penetration, new product development, market development (finding new markets for current products) and diversification (developing new product markets outside the existing business). If you apply these metrics to acquisitions, four different forms can be readily identified: horizontal acquisition – where a company acquire either a competitor or a similar product; vertical acquisition – where a customer or a supplier is acquired; diversification – where a new product or market is added; or finally, organic growth – buying a new product in the same market which to enrich the existing product portfolio.

If you can identify which form of acquisition your company is the best candidate for, you can gear your approach accordingly. For example, if one of your potential suitors has a conspicuous absence in a key emerging market, a good move may be to adapt your strategy to drive growth in that market.

For the founders of a tech startup, a strategic acquisition by a larger company is usually the best exit route. Acquisitions by their nature often leave founders with a tidy sum but do bear in mind that just because your company has been acquired does not necessarily mean you get to walk out of the door. With a structural acquisition, it is likely that you will be expected to stay on in the short to mid-term, this often equates to two to three years. This is due to the fact that it is not just your business which is being acquired but also your expertise.

Furthermore, as the acquiring company looks to maximise growth and restructure the business, expect your workload to increase. For many, this may also involve jumping through more bureaucratic hoops as your new bosses seek to drive efficiency. If one of the reasons you became an entrepreneur was to escape corporate culture, you may find that a structural acquisition temporarily sucks you back in.

It is also worth remembering that acquisitions do not always follow strict blueprints. For example, The Pult Group in Russia takes a different approach. When acquiring companies, The Pult Group does not unite back office support teams, or focus on cutting costs as is the norm. Instead, existing corporate structures are maintained, leaving the companies practically independent. Corporate culture is often key to performance, therefore we never try to dismantle existing cultures. Only top management is affected, creating a union of independent companies working with the same direction and purpose.

Of course, getting an acquirer to sign on the dotted line is only half the story when it comes to judging whether your exit was successful. The tech sector is littered with stories of founders who made millions or even billions by having their company acquired. However, the story is not always rosy. Groupon’s acquisition of Darberry is an example of a great sounding deal, but one that turned out to be pretty poor in terms of fulfilling its promise. Groupon often structures deals by offering the acquired company shares in Groupon. This was the case with Darberry, the deal was mostly a share to share exchange. However, when Groupon’s shares tumbled, following its IPO, the founders of Darberry lost out in a big way.

On the other hand, in terms of successful exits, Yandex’s acquisition of Russian movie database KinoPoisk for $80 million proved very lucrative for the founders. The acquisition was similar to WhatsApp, it consisted of both cash and shares. In short, the lesson to be learned is that unless you are a stock market analyst, receiving shares as the vast majority of the exit deal is sometimes not the safest approach.

From start to finish an exit can take a couple of years to be finalised. The key to maximising value and protecting your position is to keep in mind what your acquirers’ motives are. If you can identify where they believe the most value in your startup lies and which attribute they require the most, you can make moves to ensure that your company exploits this advantage to its full potential. For some founders, the more attractive option is to stay on at the acquiring company. This allows them access to a larger team and more resources in order to continue growing their business and scaling new heights.

Nick Davidov is Managing Director of The Pult Group and Director of iTech Capital

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