From Both Sides of the Table: An Inside Look at 3 Phases of a Successful M&A
Having been on the buyer side with Softbank Robotics for four and a half years, leading their business expansion department overseas, and then orchestrating MakeLeaps’ M&A process with Ricoh, I’ve experienced how to do an M&A in Japan from both sides of the negotiating table.
What follows is a summary of my interview with Bryan Rios at Wahl+Case, covering the 3 phases of what startups and companies should be aware of and thinking about as they go into this process.
An M&A is one of the many options you can do as an alternative to raising funds from venture capital (VC), where you instead receive funds from corporate venture capital (CVC).
Phase 1. Making yourself visible to buyers + other pre-acquisition concepts to understand
The premise is that there are companies out there looking for a startup to buy. But you don’t really convince a corporation to buy a company. That’s not how it works. You can’t go out there and say, “I’m going to sell a company,” because companies are bought, but they aren’t being sold.
Usually, corporations are looking for something specific, and then you happen to meet. So what you need to do is you need to make yourself visible to potential buyers.
On the corporate side of things, including the acquisitions I experienced at Softbank, the buying company won’t go out and say, “Let’s buy a company.” Instead, they say, “Let’s invest in some startups.”
So with these big corporations that want to invest in startups, they usually have a team, perhaps someone from the finance department and someone with expertise in the startup environment. This team’s mission is to enhance the corporation’s business portfolio. The corporation possibly knows that they don’t have the right kind of people to build a new business, so the simple move for them is to acquire or invest in a startup.
By investing in a startup, a corporation can acquire information on the startup in question (and the newest trends of the industry they operate in) because, as investors, they get access to the financials, board meeting materials, and how the company is actually performing. And hence, if they’re going to be successful. And from there, they can assess whether it’s worth it to invest more, to buy, and expand in that newly emerging market by doing so.
When they gain confidence, feel it’s a great product, and see that your customers are happy—then they say, “Let’s consider buying.”
Phase 2. The buying stage and project-managing the M&A process
You get to see and know VCs when you work in a startup environment because they show up at startup events or you get introduced to them through your personal connections somehow. But CVC people don’t often show up at those events.
So if you are looking to be bought (even if you’re only doing fundraising via VCs), find a company that provides financial advisory service, aka FAS. For example, companies such as Deloitte, KPMG, etc., will have departments that help small companies and startups find big corporations looking for investment and acquisition opportunities.
Having a go-between helps because they can vet potential CVC investors while still keeping your company anonymous. Together, you can work on an anonymous pitch deck, and they’ll send it out on your behalf, which is good if you want to keep some distance and don’t yet want to go public with your future plans.
Financial advisory companies act as project managers for your fundraising round, including M&A, and then take a certain percentage cut of the deal size. Their role and support is crucial because you are doing your own job, which is usually busy enough.
There are many technical details to negotiate during an acquisition, and the buyer’s side will naturally ask a slew of due diligence questions. When that happens, unless you’re well-versed in finance & legal industry terms, you’ll need someone to translate to you the types of data they are requesting. There’s also a lot of paperwork and technical steps, so it’s beneficial to have a project manager who sets the pace, keeps you on track with answering emails and unanswered due diligence questions, and has the expertise to make these deals happen.
I recommend interviewing 5 to 7 FAS companies and picking the one with which you have good chemistry. Deals like this can take up to half a year to finalize, so find someone you communicate well with and who gets you and what you do.
Key point: Examine fit and intent to determine a good M&A buyer
Speaking in terms of M&As, when you learn of a potential buyer, look into their business portfolio, and research why they are interested in buying you. What are the potential synergies with their existing business, and are they already doing something to move toward your business domain?
How well do you fit in with the other businesses in their portfolio? Speaking more concretely, consider what kind of customers they have with their current businesses. Are these the type of customers you would want to have as well? Is there potential for mutual customer referral? Do they have neighboring solutions or services that would be great to integrate with yours?
Is this corporation already taking some steps in your startup’s direction? There’s a lot of politics involved in big corporations. It might be the case that there’s only one exec who wants to prove himself or build up a case to promote himself, but the whole overall corporate strategy doesn’t back up this one person’s interest in your startup.
So ask yourself, is this interest from a few individuals who find this startup personally interesting? Or is there a bigger dynamic at play where the big corporation wants to move to digital—or whatever your business domain is. Because if that larger dynamic is not there, it will be harder for you to get the budget you need after the acquisition. Here’s why...
After you get acquired, you essentially become a department within the corporation that bought you. Big corporations have budgets, and you’ll now have to think, How do I fight for my budget? How do I justify that my business line or business department is worthy of that budget size? And you’ll be competing with all sorts of other business departments for a piece of the corporation’s overall budget.
To grow and be nurtured after the acquisition, you want to have a good number of people in the corporation (i.e., their board room) who agree that your startup is part of the company’s overall growth strategy. And, therefore, feel that it makes sense to spend a significant amount of budget on your company, or their internal projects that support the growth of your company.
However, if your acquisition was dependent on a few individuals, and if they lose their political standing or if they get fired, then you essentially lose that standing, and you could get fired, too. Or you won’t get the budget you need, and you dry out.
Again, the important thing is to look at the corporate buyer’s business portfolio, look at their past investor relationship materials, and look for information that shows they want to move into your domain and are publicly committing to doing so to their investors. When you see their publicly stated strategy is aligned with what you do, you can know you’ve found a buyer where the M&A makes sense as a strategy for the whole company and it isn’t just a pet project for certain individuals.
Phase 3. Post-acquisition growing pains and growth
Once you sell your company, you’re no longer the owner. That’s something you have to carve into your brain: they are the business owners, and they own all the future earnings that come from your business. It is their responsibility at the end of the day to make it grow. And your job, if they want you to stay, becomes that of a middle manager.
Usually, this transition entails a new board of directors where they have the majority vote. And you report to them about your monthly KPIs, like sales revenue, expenses, etc. Sometimes the big corporation who acquired you will say, “We’ll give you this budget, and you can do whatever you think is the best use of the budget.”
Other cases are more controlling, giving rules of how to spend the budget. For instance, “Above this amount, you have to get BOD approval.”
Becoming a middle manager means you have to communicate a lot about what you’re doing, and you have a responsibility to make those reports because they made a fairly expensive purchase. It’s their right to know what’s going on. The less you proactively communicate, the more they will follow up on you and move towards micro-management. Which one do you prefer?
The corporation that bought you invested a lot of money, took some risk, and probably had to convince some people within their company to make this move. So now they want to know how it’s going and how to help you—because, of course, they want you to succeed, because your success will prove that those who rooted for the acquisition were right. It bears repeating, you are no longer the owner of the business, so you can’t do whatever you want. In a way, it might help to think of them as your new VIP customers. And it’s best to treat them like a customer with whom you share a lot of internal information, perhaps quite similar to a customer-partner relationship.
Keep in mind, for the person you report to, there’s likely someone higher up they need to report to as well. Whatever questions they are asking you, they are probably getting asked the same questions from their bosses. You are sitting in the same boat with your counterpart.
Figure out how you can make their job easier. Think about how they can help you so you get the job done well—and you both get to report good results.
Key point: Build a candid relationship with the individuals you are now reporting to
Invest in building a friendly relationship with the individuals you’re now reporting to, and be honest, even when shitty things or embarrassing things occur. Previously, maybe it wasn’t necessary to share that much with your employees or VC investors. But in an M&A environment, if something might be a bigger problem later on, it’s best to be upfront and preemptive. “Hey, this might come up! Maybe we can fix this, but I want to let you know that something is happening here, and we might have to think of a counter action.”
There are also times when you might want to say, “I think we need more budget than we previously agreed on in the business plan.” It’s not a no-go because sometimes they might have some extra budget somewhere. In that case, even though you have previously agreed on certain KPIs and the budget, you can explain there’s been a change in the dynamics of the market or previously unknown things came up. It’s possible they can get some additional budget from another department and give it to you.
Just because you agreed to a specific business plan doesn’t mean you can’t ask them for help if you think it’s no longer realistic. They won’t like hearing that type of news, but it’s better to share and think about countermeasures together instead of keeping quiet and falling short of your objectives.
Strive for a candid relationship. To that end, go out for drinks with them. Leading up to the M&A, unless it’s a hostile takeover, both parties are usually quite friendly to each other. But then afterward, it can feel challenging to bring up questions that might bring tension to that relationship.
It’s like when you first start dating, where you don’t want to bring up something that could be slightly uncomfortable. That’s something you’ll have to jump over and have frank communication, and they will open up more as well if you do that.
The people you’re now reporting to are usually very busy—having other lines of businesses they are responsible for. Your business is something they have to do in addition to their primary focus. So don’t wait for them to invite you to drinks or dinners or chats. It’s your job to build rapport with them. Be proactive in asking them out for dinner or drinks. Of course, they’ll be busy, but don’t be intimidated by that.
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