This week's focus is on the how the corporate acquisition process has changed within the last three years. The primary changes have been brought about by the tech bust, FAS 141 & 142, SOX and some of the recent corporate scandals.
Within the corporate acquisition process, there are three main committees and teams - screening, due diligence and the integration. I'll look at the screening committee today.
Deal screening used to be a one-person affair - usually the CEO would take a call from another CEO or intermediary (banker, board member, VC) and decide whether or not to proceed. So your relationship, or that of your intermediary, with the CEO of a potential acquirer was extremely important. This certainly led to conflicts of interests and some deals that should have never been done. Today, many acquirers use a deal screening committee and formal process to adhere to their acquisition strategy and parameters. This committee usually meets once or twice a month and consist of the C-level execs, BU heads and the corporate development team. They look at any deals that have come in unsolicited and discuss proactive attempts to contact pre-defined targets. No deal process can start until the committee "green-lights" it.
As an entrepreneur why does any of this matter to you? Well, let me give you a good example. I met with a start-up in November that had a decent product, good niche and was getting some traction in their market. They had raised a couple of rounds of funding, had hockey-stick projections and talked about an exit within three years via sale or IPO (don't even get me started on the IPO stuff). For better or worse, it seems that the only viable buyer would be eBay, to which I agreed. The problem is that when I asked them to name all the companies that eBay has acquired, or the multiples paid, or the smallest deal size, or the business model of each acquisition or the structure of each deal they hadn't a clue. But, one of their VCs knows Meg Whitman! And LinkedIn tells me that I'm actually only three degrees separated from Kevin Bacon - big deal! If the extent of your preparation for a sale is that your VC knows someone, you're in trouble.
So we rolled up our sleeves and did some work. First I brought their projections down to something slightly more realistic and figured the amount of funding it would take to get there. Then I got some data on eBay's past transactions. Bad news - when I applied the revenue multiples from eBay's three smallest deals (in terms of revenue not consideration) to the future time when our company thought it would hit those revenues, not only didn't they beat their liquidation preference, but it meant running the company a lot longer than they had originally thought. Reality sucks!
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