Many companies, along with their boards, have begun creating acquisition parameters or a set of boundaries for their acquisition strategy. While I don't think understanding these parameters is as important as gaining clarity on would-be acquirers' strategies, it may impact how you position your company for a sale. Plus, it may make you reconsider which companies are viable acquirers.
Examining a buyer's past acquisitions should give you a good idea of where they would like to play. To give you examples of the types of limits you can run into, I've spent some time this week talking to three corporate development colleagues from the software industry. Their companies are all public but vary in size and market segment. Here is a sample of what they had to say about acquisition parameters:
Company #1: "We're a company that's about products not technology, so we look for acquisitions that are proven in their markets. Most of our acquisitions have been in business for at least of seven years. We believe that's the amount of time it takes for a product to be mature enough to live without its management team. Size isn't an issue to us - we're not afraid to do large deals, and our smallest deal was around $25 million - I can't imagine going any smaller. Every deal goes in front of the board no matter the size. They may not vote on it, but they want to know what's going on. We use both stock and cash depending upon circumstances, FAS 141/142 has made using stock a lot easier. Valuation is our biggest issue, we will never pay a higher multiple than where we trade. We are very patient - we walk away from about two-thirds of the deals we're interested in because of valuation. We've never done a cross-border deal, but targets with a strong presence outside the U.S. are more appealing to us."
Company #2: "We limit our acquisition size to 10% of our market cap per deal. Our board is pretty stringent on that. They've shot down a couple deals that would have gone beyond. We don't have any valuation parameters per se. We work with the target's management team to develop of plan and base the number off that. We can be pretty aggressive if we feel the team is energized by the plan. Too often we see management teams completely burned out by the time they show up. We walk from those deals - we want people who are still hungry. We prefer to buy local [Silicon Valley]. We want everyone in the same building - that's important to us."
Company #3: "Mid-sized acquisitions ($250 - $350 million in value) are our sweet-spot - we're committed to doing one a year. We're moving away from the small stuff. In the past we've bought too much technology and not enough market share. We need immediate impact, the Street wants numbers not promises. We've never used our stock for a deal, and I don't see that changing. Our #1 rule is that you must beat us at least once in the market place to get bought. I spend an enormous amount of time with our sales managers finding out who customers are considering using and why. We look at public comps for valuation, but for the most part we stick with the multiples we've paid in the past - we know they're right."
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