|the netpreneur's perspective on
anatomy of an acquisition
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that comes with scars
you. You left the most
important part of the bio out: three lovely kids and a wonderful wife.
That's where it starts.
First of all, I want to thank everybody for being here.
These meetings continue to amaze me as I sit in the back and
watch so much energy pop. Thanks
to Alexandra, Raj, Oron and Frank.
You got great wisdom today.
It is wisdom that comes with scars, as every one of these
panelists will attest, so pay great heed to what you heard because
it's exactly what you will live through.
I want to start out with the point that you will always
sell your business. It is
a horrible thing to think about when you start, but the reality is
that you will always sell. You
should be thinking about it all the time so that when the day comes
you will be prepared for it. You will sell the first time you bring a
VC firm in, because you are selling a part of your soul.
You will sell when you do an IPO, because you've opened
yourself to public markets. You will sell when you are acquired, if
that's the outcome, but eventually you will sell. We can’t assume
that we will all become Bill Gates and stay his course, but he went
public and had to sell to some degree.
In this same way, Ellison had to sell, and others had to sell
Raj said it clearly; they are very emotional times.
I can't tell you what you go through, if you haven't felt
it—knowing this baby you created is no longer yours.
You must get to the emotional decision that you are comfortable
with the outcome, otherwise it doesn't work—unless you totally walk
away from the deal. A
second point that Raj mentioned was ego and greed.
Something that my partner taught me about negotiations which
served us well over the years, is that when you go to sell—whether
it is an acquisition, a VC or an IPO—define what you want out of the
transaction. Make sure
you get it and focus less on what the other person is getting.
More deals go down the drain because of jealousy about what the
other guy is getting, in spite of the fact that you are getting what
you wanted. It is a hard
lesson, but a real one.
Tie that to my next point: Make sure you have an advisor with
you. Ideally, you'll have
an agent or a banker, and it doesn't have to be a fancy banker.
They make it less personal and give you a negotiation buffer
point. These are complex
transactions, and you can be fleeced in a second.
I can take you through chapter and verse on earn-outs, how you
can set them up as the investors, and how you set them if you are
being acquired. Boy, you
had better know every in and out of the process or somebody is going
to make a mistake. It is
vital that you have top counsel.
This is the time when you don't worry about paying an attorney
$500 an hour. Don't do it
normally, but at this point you go for the very best, even if you have
to bypass your existing counsel.
You are dealing with your life and you don't want to make a
mistake at this point in time. Advisors
You also want to establish what I call the "brakeperson."
Once they get started, deals have a life of their own; they
can't stop. It's a
phenomenon called "deal momentum."
Juices get flowing, the competitive spirit cuts in, we start
losing track of whether the deal remains right and focus instead on
getting it done. While
you go through a deal, times can change.
If you are negotiating 90 days in this space, life changes,
markets change and you change. Make
sure that somebody is tasked with the responsibility of asking
everyday, "Should we go forward with this deal?
Should we stop it?" The
Oron said that deals are about people.
Deals are totally
about people, unless you are doing a pure technology licensing
agreement. That has
tremendous implications when you are in an earn-out or stock-for-cash
transaction. If you are
in cash transaction you can take the money and walk, but those are
being done less right now. Consequently,
you may negotiate the greatest deal, but if chemistry and mechanics
don't work, post-deal you lose.
Most acquisitions don't work; most acquisitions seldom pay off.
The reason is that we don't spend enough time understanding the
cultural differences and the assimilation issues of the transaction.
I think the AOL/Time Warner deal is the deal of all time, but I
sent a case of champagne to Steve Case and wrote,
"Congratulations on the merger.
Good luck on the assimilation."
post-deal. Everything is
assimilation and it is a bear, an absolute, gut-wrenching, horrible
bear. Can I be any
clearer? You are going to
go through stuff you could never imagine you would go through.
Frank made a great comment—I love the cube 4BHO8 remark.
It says so much in this context.
I said something two weeks ago to a close friend and it stopped
him dead in his tracks. As
the CEO, when you are going to do the deal, ask yourself these two
questions: The deal is done and you are now in cube 4BHO8.
A reporter from the Wall
Street Journal comes in and walks down the aisle, right past you
to see the real CEO. How
are you going to deal with that?
You are no longer the story.
Worse yet, the night before you took a bunch of clients and
friends to a wonderful dinner and spent far too much money which you
never should have spent. You've
never worried about this before.
You get to work the next morning and realize that for the first
time in your new life you have to fill out an expense chit which
someone else has to approve. Ask
yourself, how are you going to deal with that?
The answers to those questions caused the CEO to examine the
cultural fits more closely, and the deal slowed down.
My friend said, "Wow, that's what life will be like."
It is exactly what happens.
You will be meshed into a machine.
That is not bad, necessarily.
If all the ingredients are right for you, it can be terrific,
but realize those implications.
I want to return to the emotional part.
I believe that there are two parts to such a decision.
The first is your personal emotional decision.
You have to come to grips with this thing emotionally for the
deal to work. That is not
a business decision; it is a personal, individual decision.
If you are the primary founder or owner, it is an emotional
decision—unless you went into it from the first day strictly as a
mercenary saying, "I'm going to pop it, move it and get out of
it." Chances are
that most of the people in this room are not in that situation, so the
emotional decision is in your head.
You have to think it through and be comfortable when the deal
is finished. I have seen
deals go all the way through the negotiation, and the whole time you
knew the person had not sold himself or herself on doing the deal.
When everything is on the table, all there in black and white,
they feel the pain and retreat. After
two months of negotiations, no one likes that, and you are not going
to get another business deal very fast. You've got to make the
emotional decision before you start this process.
Second, there is the business decision.
What is the right thing for the business, for the owners, for
the clients and for the staff? You
have to separate the business decision from the implementation of that
decision. What do I mean
by that? I believe that
you never give major acquisitions to your staff or your line officers
to do. It should always
be the CEO's job to do that deal.
someone can't be the Vice President of Sales and give input on a
transaction that could wipe out his or her job.
Once you make the right business decision, then make all the
decisions that affect the implementation, the people issues, etc.
Be very clear, and that leads to a point Oron got into: Watch
I can't tell you how many times we went into an acquisition,
did the deal and learned afterwards that this person said the famous
words, "Trust me. I'll
take care of you." And,
of course, it's a pooling transaction, which means no one can touch
stock. The only way this
can be resolved is that the new company now has to put new options on
the table which they never planned for in order to keep those troops.
They are not happy about it at all, and they want to cut your
heart out at that moment. Before
you do this deal, go back and ask yourself if you have made any
promises. Ask yourself,
"How am I going to deal with them?"
Don't cop out and say, "Well, I can't do anything because
of the pooling law." My
comment to CEOs who do that used to be, "You have a checkbook and
you make a lot of money. Write
a check. Put your money
where your mouth is." There
is always a resolution; you just have to have enough guts to deal with
the promises you make. Be
very careful with the promises. If
you make a promise, involve an attorney right away.
There is no such thing as doing it personally.
That's a mistake. Even
if it is your best friend, you have to assume that he or she could be
hit by a truck and you would be dealing with their estate.
There is no such thing as trusting each other at that level
because life changes. Anything
you do has to go to counsel to guide both of you through the process.
I want to come back to advisors.
Have the banker or the VC there for another reason.
I don't know if everyone would agree with this, but, when
you're doing the deal, one thing you hate to have is a young company
that has no banker. Things
become irrational. You
get a valuation and they say "Oh, my gosh, you can't do this to
me!" The bankers,
even though they are being paid, bring a sense of rationality to the
table that allows the deal to go forward.
It's very rare for firms, even large firms, to have the
maturity to deal in negotiations without a banker at some point.
The last thing I'll leave you with is one very key message.
The biggest deal we did emotionally was in 1989 when my firm
merged with a company in Pittsburgh and created Legent Corporation.
We did about 20 transactions after that, and another fairly
major merger in 1992. My
son was looking at my pictures in the basement the other day, pictures
taken before those deals. He
looked up and said, "Dad, you had all kind of hair."
If you are going to do acquisitions, get Rogaine now.
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