Technology acquisition decisions are fraught with complexity. Companies have a wide range of options other than acquisition, and sometimes it’s difficult to assess which path is the best way forward. The constant decision tree of build, rent or buy can monopolize executives’ attention more than the end game itself. Executives should consider these three essential components in the build-or-buy decision (and take note of one particular key risk).
Competitive Advantage
The first test in pursuing an acquisition strategy is deciding whether an acquisition will provide your company with a distinct competitive advantage.
Will this transaction build a moat around your tech stack? Will it provide some differentiated value to your customers? Will it give you access to some new capability that doesn’t currently exist elsewhere in the market? Will it block others from accessing your customers?
One successful transaction in this area is Amazon’s acquisition of Twitch. The ability for Amazon to provide a livestreaming distribution platform helped bolster the already growing portfolio of businesses within the Amazon ecosystem. While YouTube had been the dominant Internet-based video content platform for years, Twitch provided Amazon a way to give its users a vast amount of never-ending content that targets a younger demographic in a differentiated way, since the platform is mainly gaming and esports streaming content. While YouTube is focused on recorded content and playback, Twitch gave rise to the element of live viewers in a time when the media and entertainment landscape was shifting dramatically to on-demand content. Brands and sponsors that want to reach this younger demographic are able to find audiences that used to watch sports on linear television. This deal has kept Amazon at the forefront of the direct-to-consumer content market, alongside Google, Netflix and Facebook.
Acceleration
The second test in evaluating an acquisition strategy is whether the transaction will significantly speed up your product development road map. Before embarking on a build plan, it is important to scan the market for opportunities to acquire technology and teams that can get you where you want to be in a fraction of the time for a comparable or lesser cost. A cost-benefit analysis can help determine whether the savings in development time and resources, coupled with any new direct or indirect lines of revenue during the previous development timeline, is enough to justify the price tag for the transaction and integration. Plugging in a technology acquisition can allow your company to reallocate key resources to other important tasks in parallel, provided the integration issues do not create a distraction to that effort.
For private companies, another factor that may play into this decision is hitting milestones or growth targets to achieve additional rounds of financing. Organic growth can be slower than expected, and a strategic technology acquisition may be an option to accelerate customer acquisition, increase top-line revenue or create operational efficiencies that reduce cash burn. Provided there is a way to effectively finance the acquisition that doesn’t make the cash burn process more complicated, acquisition or merger allows the executive team to allocate funds to other growth areas such as sales and marketing.
For public companies, an acquisition may improve short- and long-term goals, burnishing the company’s share price and signaling continued growth to the market. Salesforce, an active acquirer, bought MuleSoft in 2018 to help grow its Salesforce Integration Cloud. This acquisition helped Salesforce provide complementary products and services for its clients that would ultimately give them a more holistic view of their customers and surrounding data. The transaction allowed Salesforce to quickly ramp up this capability and drive additional value to customers while generating new revenue opportunities for itself.
While Salesforce’s acquisition of MuleSoft appears to be paying off, there are plenty of examples where a public company’s acquisition decision adversely affects the share price. Common pitfalls include paying too much of a premium in a seller’s market, assuming outsized debt after the transaction, or expending too much cash that could otherwise be used to grow and accelerate the company with new investment. There’s always a trade-off in the build-or-buy decision, giving shareholders and the public the opportunity to let their opinion be heard.
New Market Share
The third test to consider when evaluating technology acquisitions is whether the transaction will help you expand into new markets or prevent competitors from taking a larger piece of the existing (or future) pie.
There are numerous examples when a strategic acquisition has provided access to additional consumers or users immediately. Instead of building a product road map, developing it in-house over an extended period and then acquiring customers, it may be faster and more effective to acquire an existing company that is already operating. A company can immediately compete in a new or complementary market, increasing overall market share in the process.
When there are a limited number of large competitors in a sector, acquiring disruptors or ancillary companies in the space may be required to block the competition from gaining market share. Valuations of these target companies can rise quickly, since the cost of acquisition may not hinge on traditional market comps and multiples. Valuations may instead be derived from the strategic value gained over a key competitor, which can be harder to quantify accurately. When executed well, these deals can be transformative for companies, setting them on a path for market dominance for years to come.
Hidden Risk
While it’s not always hidden, post-transaction integration planning is oftentimes underprioritized. Corporate development dealmakers are tasked with finding and executing transactions that will help a company grow, but planning for the integration of people, process and technology many times ends up on a list of secondary activities.
The reality is that this part of the process can make or break an acquisition. Are the target company’s employees and management team incentivized properly? Will their business and technology continue to thrive independently for a time, or will you try to rip off the Band-Aid quickly and reduce redundancies up front, folding them into your larger corporate structure and systems? Will the corporate cultures clash or combine well?
Many times acquisitions can involve a larger, more bureaucratic and slower-moving buyer and a smaller, younger and more nimble seller. One needs to think about the best practices in leveraging the established resources of the buyer along with the new processes and ideas that the seller may bring to the table. Also essential is having a clearly defined strategy and methodology to communicate effectively across the new structure before, during and after the integration.
All these questions need to be evaluated before a transaction is consummated, and to be considered part of the ROI calculation. A smart and thoughtful acquisition integration plan can be the difference between a successful paper transaction and a successful real-world transaction.
Manatt partners with buy- and sell-side companies at all stages of a transaction, on both the strategy and the legal aspects of a deal. We have extensive experience helping our clients successfully navigate transactions of all shapes and sizes, and we would be happy to discuss where we can provide value to you.
Connect with me at JCarlson@manatt.com