Turn to the financial section of any newspaper today, and you will find an array of articles concerning M&A activity. Increasingly, companies across a broad spectrum of industries are seeking to grow their business, counter tepid business markets at home, add synergy, or enter new markets and diversify by acquiring other companies.
A good example of this type of growth strategy is Cisco Systems. In 1993 Cisco was confronted with a new switching technology that threatened their leadership position in routing. Cisco’s engineering team was confident they could develop a superior switching product themselves, but it was evident to their CSO, Mike Volpi, that there were already a number of well-funded switching companies years ahead of Cisco in the race to market. Instead of developing their own product, Cisco decided to acquire an emerging switching company, which turned out to be a huge success. The descendants of that product line provided Cisco with an additional 10 billion dollars in revenue.
That acquisition set Cisco on a path that, over the next seven years, resulted in 75 acquisitions, and at its peak represented 50% of Cisco’s revenue. It also cemented Cisco as a role model for tech M&A.
Since then many other prominent companies such as Google, Facebook, Groupon, LinkedIn, Zynga and Twitter, have explored similar M&A growth strategies with great success. However, the reality is that the majority of acquisitions that take place do not produce value. The M&A market is a lot like the publishing industry—publishing houses rely on one or two best sellers to subsidize a much vaster pool of books that merely break even or lose money. When looking at companies with aggressive acquisition strategies, it is not uncommon to find that 10-15 percent of the capital deployed for acquisitions yields 70-90 percent of the value created. In other words, a significant number of acquisitions do not contribute to value creation, but the ones that do have a huge impact.
At ShareVault we’ve facilitated thousands of acquisitions worth billions of dollars, and we’ve learned a few things:
1. Know Your Acquisition Criteria
Once you have defined M&A as part of your company’s growth strategy, it is critical to develop a comprehensive acquisition criteria checklist that will enable you to identify both the ideal and essential characteristics of the businesses you are targeting. A well-developed acquisition criteria checklist allows you to define carefully enough what you are looking for so that your search efforts are well-directed, but not so narrowly that you overlook qualified targets. The process of developing an acquisition checklist can also reaffirm your company’s goals and bring your overall strategic plan clearly into focus. For help developing your company’s acquisition criteria click here.
2. Provide a Due Diligence Checklist
One of the greatest benefits of an aggressive acquisition growth strategy is that you may target a company that may not have thought of themselves as a business for sale until approached by a buyer. That means there may not be others bidding for the purchase of the company. However, it could mean that the company may be unprepared for due diligence. Providing your due diligence checklist not only helps the target company prepare, but it ensures that you get exactly the information you want. For a sample due diligence checklist, click the button below.
3. Choose the Virtual Data Room You’re Most Comfortable With
Not only should you provide your target with a due diligence checklist defining what you want, but you should also provide them with the file-sharing repository where you want it housed securely. Remember, a company unprepared for due diligence may be hesitant to turn over their IP and other confidential information to a prospective buyer without ensuring that the information is controlled and secure. At ShareVault, we provide a state-of-the-art virtual data room that gives users complete control over who gets to see what and a comprehensive level of security controls that provide for virtually “shredding” of documents after they have been downloaded. Furthermore, our virtual data room has a built-in Q&A module that provides a convenient forum to ask questions, get answers, and ensure the deal process goes as smooth as possible.
Remember that M&A can be a powerful growth strategy for your company, and it should be approached both thoughtfully and intentionally. Nuances and risks abound, as do the rewards if executed correctly. Businesses that shy away from acquisitions because of fear of failure could be missing great opportunities. At ShareVault we have learned that implementing the strategies outlined above can go a long way in making the M&A process successful.
Richard Andersen is the founder and CEO of ShareVault. He has an MBA from the University of California at Berkeley and has worked for companies such as Apple, eBay, Ernst & Young and MarketFirst. He brings an entrepreneurial mindset to everything he does and is passionate about creating strategic partnerships.