Merger myths and misperceptions kill deals. They can prevent you from getting what your company is worth, or worse; you can miss the tech M&A window altogether.
Here are the top ten:
The valuation comes first – It's critical
This may be one of the most deadly myths that will prevent you from getting your optimal outcome. If you meet an investment banker or consultant who says, "I can whip up a valuation for your tech company, then take you to market and get it," walk out immediately. He or she doesn't know what they're doing. Buyers laugh at these valuations.
Tech M&A is unique. It's about valuing intangibles. The value is created through the process ‒ a true global buyer search that creates an auction environment.
Valuations done too early can produce sticker shock, eliminating good buyers before they get to know you. Or, just the opposite, they can set low expectations when trend alignment or competitive bidding in the market can get you a higher value. Valuations are not used much today because of the strategic nature of acquisitions. If formal valuations are used, it's generally much later in the process, when you know who the final bidders are. Then, you can factor how they value, what they've paid for similar acquisitions, and how you might impact their strategic position and earnings. That's when you want the firm that's done more valuations than anyone: Corum.
Companies are bought, not sold
This old myth is nonsense ‒ more so today in the virtual world, post COVID. This logic says, "If you build it, they will come." But those of us who are entrepreneurs know that doesn't work. You need marketing and sales, the same as when you're selling your company. You need to create buyer tension. The trouble is that believers of this myth are waiting for the phone to ring. And if the phone does ring, all too often that caller is a bottom feeder dialing for deals, trying to lock you up into exclusive negotiations. Don't wait for them to call. You need to get out there, control the process, talk to multiple bidders, and calibrate your true value.
The world of buyers is far bigger than you know. It's a world that includes non-technology firms, strategic buyers, foreign buyers, financial buyers, search funds, family funds, and holding companies. Indeed, 25 percent of the companies we sell have never heard of their buyer!
Our financials are weak – we can't sell
Even the smallest, money-losing company with a negative balance sheet can sell. Today it's not about the financials. It's about the story. It's what you represent to the buyer's future with your technology edge, user-base, and domain expertise. Your thought leadership, properly presented, helps get you those high values you read about in the headlines.
Buyers are smart. They don't expect young companies to have the brand name, distribution, and user base to be highly profitable. That's why you want to merge with a bigger partner in the first place. So, worry less about trying to spin your financials. Spend more time crafting the message, telling your story, and creating that "armor-piercing soundbite" that will get buyers to pay attention to the opportunity your firm represents.
We have a buyer already!
Talking to only one buyer is the biggest mistake company owners make in tech M&A. Even if you have a buyer, how do you get the right price and right structure without the leverage from other bidders? How do you even make it through due diligence, where up to 80 percent of the deals die? This is especially true post-COVID because you don't have the advantage of a personal relationship.
The majority of companies we work with have been approached by a buyer ‒ some even have offers in hand. Having sold more tech companies than anyone, our experience shows consistently that 75 percent of the time, another firm will end up buying you. It's not the first bidder. So, do a true global partner search. If you go through the process, creating an auction environment, even if the first bidder is the final buyer, the competitive tension created will generate a 48 percent better overall value.
More importantly, you will have a much more optimal agreement ‒ better structure, less liability, lower tax burden, better employment, and non-compete agreements. You'll also come out with a better integration plan for the employees, something other investment banks ignore.
Talking to only one bidder might also lead you into court because your minority investors, with the law on their side, may say, "Why did you sell to the first buyer who came along, violating your fiduciary duty?"
We want to do a raise...then sell
Once you raise money, you're out of the merger game for years, diluted and lower on the liquidation schedule. New investors will come in at a higher value and then expect to sell at a much higher price to a major strategic buyer or fund. That's not going to happen during difficult times. Post-COVID, companies are imploding with down financing rounds. Venture Capital groups are less likely to invest, with much tougher terms if they do.
Remember, buyers are still active. If you have something you think they want, at least calibrate your value in the market before raising money for the long term. You don't have to accept any offer, but you need to know where you stand.
We need to launch/update product...then sell
This misperception is keeping way too many firms from calibrating today's tech M&A market. If the buyers like you, they will want to be involved in the update or rollout of a new product. On average, buyers can increase your prices a minimum of 20percent. Moreover, they have the distribution, user base, related products, and marketing power to make a new product release fly as the next generation of technology.
We want to buy someone...then sell
Buying another company, then trying to sell immediately, can kill your deal. First, it takes precious time. Second, a public company buyer has stricter compliance issues, including Sarbanes Oxley disclosure ‒ a buyer will likely have to redo the due diligence on the acquisition to please the regulators. Third, they may not want the company or asset you acquired. This can nix your deal, or at a minimum, slow the transaction because of the higher liability.
If you believe you are the platform that will consolidate the market, a better merger strategy is to present that to the buyers. Show them how you can grow market share and penetration by making acquisitions once acquired. We've done this roll-up strategy many times in the U.S., Europe, and, most recently, Asia, where the buyer saw more significant value in the company we represented because of this expanded vision of market dominance through follow-on acquisition.
Buyers don't want an intermediary
This one is rooted in fear of upsetting your buyer. They may have even told you not to talk to others. Why do you think that is? The buyer wants to pay as little as possible. You're taking a weak stance with the mentality of placating the one bidder. Don't do that. After all, it's your company.
An investment bank acting on your behalf can be a relief to buyers. They know you're serious and will be better prepared, as most deals die in due diligence. They know you'll be guided through a well-run process with less chance of failure. Remember, due diligence is expensive and time-consuming for them too.
Most CEOs or founders are not well-versed in running a tech M&A process, making the entire process longer. And it can get incredibly emotional and polarized. Not surprisingly, deal fatigue and CEO burnout are among the leading transaction killers. This is doubly true in the age of virtual mergers, where the selling CEO no longer has personal interaction in negotiations. For this reason, the failure of self-run mergers went from 80 percent to over 90 percent post-COVID.
In a virtual world, it's more crucial than ever who represents you. The buyer may not know you, but they should know your investment banker. Buyers know that Corum works with only a limited number of high-quality, well-screened companies—companies that we take through the industry's best merger preparation. As one major PE firm that has done over a hundred million dollars in transaction value with us recently told our client, "You're lucky you're working with Corum. They do the job right, deals close."
I don't want to go to market too early
Baron von Rothschild in France, was quoted as saying, "I made my fortune by always selling too early." The same is true today, with a record number of buyers and a record amount of cash (over $4 trillion). Everyone is scrambling to see the next company or know of them as soon as possible.
Trends can be fast-moving. If you wait, you may miss the window, and your value will plummet. For example, those of you who have attended the Merge Briefing know we have a case study of two competitors, one American, and another French. The former seller hit the market right, at the peak, and sold for a multiple of six times sales. The latter dallied, missed the window, and sold for only 0.6x sales. That's a 10x multiple difference. You will also miss the window if you try to ride out the current recession.
Our timeframe wasn't to sell now
Timing is everything in tech M&A. We see this attitude of a fixed timeframe in Europe and Asia, where they follow a dated model of doing a raise, a bit of growth, another raise, more growth. The market doesn't care about your personal strategy. You need to listen and pivot strategy if necessary, always reconsidering if the time is right.
You can't control timing. Pay attention if you start to see deals happening in your sector or get approached by a buyer. That's often a sign of consolidation. Don't fall into the trap of thinking things will be better if you wait a few more years. The reality is that your market may have consolidated by then. You could be the last private company competing against well-funded public competitors. Forget about getting that high valuation, all-cash deal. There probably isn't even a buyer at that point.
Conclusion
Don't fall into merger myths and misperception traps that have you dealing with only one buyer or missing the market. It's about the right story to the right person and the right buyer at the right time. The most important transaction of your life, for you and your family, deserves the same focus and attention you put into building your company. So, do it right.