'Top Ten' M&A Deal Insights From Leading CEOs, CFOs And VCs M&A Seminar Series: Key Tips From All Eight Sessions


M&A Seminar Series—Session Eight: CEO View: "Top Ten" M&A Deal Insights By Tony Zingale, Dave Orton, Ben Horowitz, David Healy

  1. Build a Great Company First. Maximize valuation by building a great company (not just a great product) that is the leader in its market segment. You can become a market leader by buying companies to fill out your product suite, increase average sales per customer and improve your go-to market strategy (Cadence; Opsware; Clarify; Mercury Interactive) or by using M&A to expand into new markets (ATI; Opsware). The best deals help the buyer to start selling "business value" to customers' senior executives rather than "technology value" to their R&D or IT groups (Mercury Interactive). Shedding weak businesses (Loudcloud's web hosting business) or product lines (ATI's low margin graphics boards) to focus on core strengths is critical.

  2. Evaluating Strategic Alternatives (Including Staying Independent). CEOs (and boards) must evaluate strategic alternatives as a way to expedite the maximization of shareholder value. In deciding whether to remain stand-alone, ask: Are we #1 in our market? Is our market large and growing? Will our market remain stand-alone? If yes, more value is generally created stand alone. However, if it becomes clear that you cannot become the No. 1 player in your market segment (Clarify vs. Siebel), or that the market will change (via consolidation, increased competition, or declining demand) in such a way that the upside is or may be adversely impacted (Loudcloud; Opsware), perhaps it is time to consider selling. In this regard, CEOs must ask tough questions about the strength of the management team, the strength of the company's product mix and the impact of new trends and should not assume "perfect execution". If you receive a cash bid that is clearly better than any risk-adjusted, projected stand alone value (Clarify/Mercury Interactive/Opsware), the board should maximize value for shareholders. It is imperative to "get big or get bought", because customers prefer to buy from the market leader.

  3. Do a Market Check? Generally, it is best to maximize M&A valuation through a competitive deal process and by maintaining an ability to remain independent and thus having an ability to walk from the deal (Opsware; Clarify; Mercury; ATI). Sometimes, however, a thorough market check may not be possible, such as where a leak about the deal might upset a target's competitive situation or where there are only a small number of viable bidders (ATI). Often, strategic partner discussions will lead to M&A or make it easier to do a rapid market check (Opsware).

  4. Determining Valuation. Macroeconomic factors should inform your assessment of your own valuation. Valuation is relative to that of peers and targets, and "markets can remain irrational longer than you can remain solvent", so don't wait for a market rebound to do a deal. Many deals are done for strategic reasons (ATI/AMD, ArtX/ATI, Opsware/HP; Mercury/ HP), while others are done for defensive reasons (SGI/Alias Wavefront). Sometimes, the price is such that a target should accept the deal even though the business synergies are less compelling (Clarify/Nortel).

  5. Negotiating Tips For Targets. Potential targets must: have a disciplined negotiating approach and stick to it; be truthful and consistent in their statements; focus on what is motivating the buyer (e.g., why the deal will help the buyer more effectively deal with its customer base); and maintain deal momentum (which may mean passing on slow moving bidders). Sometimes, you can maintain negotiating momentum by creating a valuation model and limiting discussion only to the assumptions. The target team must know more about the markets, competition, and its potential revenue upside than the buyer's negotiating team.

  6. Comparing Bids. Targets that are comparing alternate deals that each provides for an earnout or the receipt of stock merger consideration should evaluate the long range success of each buyer, and the timing to liquidity, especially for target employees subject to continued vesting.

  7. M&A Essentials. The deals that tend to be the most successful have good strategic fit, minimal product overlap, a good cultural fit and a price that is fair to both parties (so critical target team members are retained). In addition to these factors, the parties must focus on issues that will impact deal certainty. Cultural fit (including management style and work ethic) is often hard for a target to determine in advance. Companies with a more open communications style can more effectively overcome cultural differences. As to strategic fit, acquiring a top brand that has no synergy with the buyer's core business is less likely to be effective than a deal that leverages the buyer's technology, products and brand to enable it to grow out of its core business. If a deal is critical to a buyer's strategic objectives and will result in substantial top line synergies, it may make sense for the buyer to pay at the high end of the valuation range.

  8. Importance of Being Great at Both Internal R&D and M&A. The best growth strategy is to combine strong internal R&D efforts with a robust M&A program so as to maintain market leading products (Clarify/Cadence). An effective M&A strategy requires an environment where risk taking is respected, not penalized.

  9. Buyer's Channel as a ROI Driver. Buyers with a robust marketing and sales channel (Oracle; Cadence) can bring target products to market quickly, which can help drive revenue synergies and ROI and is a selling point to target CEOs who want their technologies to achieve market acceptance.

  10. Integration Tips. Executives need to focus up front on integrating acquired companies. Emotions and broad public statements ("no layoffs") should be avoided as they are counter-productive and fast execution is critical. They key to successful integration is giving someone (optimally the target CEO) substantial authority to drive integration decisions, retaining key target employees, and motivating the target team members to focus on achieving the buyer's (not the target's prior) business objectives. Often, it is better to be crisp and decisive than to be "fair" or "right" in making integration decisions. Implement cost synergy plans (often involving layoffs) quickly, then set expectations and create alignment within the company. It is difficult to integrate a major acquisition and achieve strategic synergies (create new, combined products) when the buyer has weakness in its core business (SGI/Cray).

    Link to more detailed Summary of Panelist Interviews and Panel Transcript: http://www.fenwick.com/docstore/Publications/Corporate/M&A_Sessions/COMBINED_Ses8_Top_Ten_Summary_Transcript.pdf (http://tinyurl.com/yegdwb7)

    M&A Seminar Series—Session Seven: VC/Chairman/CEO/Founder View: "Top Ten" M&A Deal Insights By Glen Antle, Mike Child, Don Lucas, Jim Solomon; Dave Healy

  11. A Successful Merger of Equals is Possible: Valuable lessons can be learned from the successful ECAD/SDA merger, which eventually led to the formation of Cadence, the leading company in the market for electronic design automation ("EDA") software. The ECAD/ SDA merger was unique because it was a true "merger of equals" in which the management and board of the new company were split equally between ECAD and SDA representatives. The following factors contributed to the success of this rare form of merger: (i) the two corporations had complimentary growth strategies and products: ECAD was public with a strong, slow-growing product while SDA was a private company that had missed the IPO window by a single day but had a fast-growing, profitable product; and (ii) there was a lack of ego at the top: the CEO of ECAD was willing to compromise regarding his role in the new company and was willing to reach out to the acquired corporation personnel to make them feel integrated.

  12. Avoid a Narrow "NIH" ("Not Invented Here") Attitude: A NIH syndrome refers to companies' reluctance to buy technology not invented internally. Companies should avoid this approach and instead evaluate the success of an acquisition based on the following factors: (i) quality as the #1 factor: focus on acquiring high quality software engineering and products rather than developing products internally; (ii) acquire companies with manageable costs of integration: avoid buying companies that would take an unreasonably long time to be absorbed, even if the deal would allow you to enter into a new market segment; and (iii) look beyond the financial benefits of the acquisition: although half of the acquisitions that Cadence made arguably did not make sense financially, the other acquisitions that were successfully integrated were critical to Cadence's continued growth.

  13. Benefits of Merging Competitors. Merging competitors (PiE/Quickturn) improves the quality of their products due to synergies from combining their core strengths, combines the strength of their IP portfolios and (where there are infringement issues) reduces risks and costs related to IP litigation. "The benefits of competition are over-rated."

  14. M&A Synergies for Fast Growing Companies. The combination of a solid acquisition strategy and robust organic growth can lead to significantly enhanced shareholder returns.

  15. Keys to a Successful M&A Strategy. Key elements of a successful M&A strategy include: (i) having a business development group that is separate from operational management, which can lead to a more objective and efficient evaluation of M&A deals (Oracle); (ii) making personnel decisions before the deal closes to quickly establish certainty (Siebel); and (iii) the buyer CEO's demonstrated commitment to the integration of both companies (Siebel and Datek) and to ensuring cultural fit by making the acquired company feel as an integrated part of the new entity (ECAD/SDA).

  16. Earnouts. An earnout may be the most sensible way to price a deal when the...

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