Why Acquisitions Look So Good Right Now

I spoke with a former colleague today who works in business development.  Business development and corporate development are like Yin and Yang - business development drives organic growth through sales-related partnerships, while corporate development promotes external growth through acquisitions, joint ventures and strategic alliances.  His take on the current business climate was this - companies should expand sales and marketing instead of wasting money on acquisitions that seldom work anyway.  Well, I've been down that route before, and it is not as easy as it seems.  Here's why:

1. U.S. annual IT spending grew by only 5% in 2004, after three straight years of declines, and is expected to grow at a 5% pace for the next three years (courtesy Forrester).
2. Technology R&D spending increased 40.5% from 1994 to 2000, but IT R&D spending was down 9% from 2000 to 2004.  In 2000, technology firms comprised 11 of the top 25 global R&D spenders, but by 2004, tech companies took only 6 of the top spots.

In this type of market it's hard to grow top line by throwing more reps and ads at companies without any new product innovation (BTW - this is why every public tech company is now talking about how important the SMB market is).  So when Wall St. demands growth, CEOs turn to their sales managers who, realizing their costs are higher while bookings are flat, turn to blame the CTOs for a dearth of new products or updates, who turn to blame the CFOs for cutting costs, and suddenly acquisitions look quite promising.

The take-away for entrepreneurs is this - you need to understand this environment: your product has to please the sales manager, your technology impress the CTO and your company has to make the CFO not lose any sleep.  You also need to understand how the corporate development function has changed over the last five years and the new accounting changes and regulations impacting transactions.  Corporate M&A is not done the same way it used to be.  Are you prepared for this?  Do you and your board know how to navigate this?  Gaining insights to this new paradigm is the topic for this week's posts.