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the netpreneur's perspective on the
anatomy of an acquisition

page four of four | previous page

mario morino: wisdom that comes with scars

Thank 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 as well.

          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 become critical.

          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 brakeperson.

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          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."  Everything is 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?

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          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.  Why?  Because 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 your promises.

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          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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