Sunday, August 1, 1999
A typical company in a non-technology sector such as banking, oil or consumer goods tends to make acquisition decisions in a six-month time-frame, very best case. A technology company can (and often does) make these decisions within a mere 30 days. Reasons: rapid technology changes, changing marketplace, lack of comprehensive product range, financial benefits and the fact that startups simply do it better.
But reason doesn’t mean that the acquisitions rhyme! At the risk of being soap-boxish, I am going to classify tech acquisitions into three broad categories: the good, the bad, and the ugly.
The Good
Make no mistake, there are many positives to an acquisition for all parties concerned. It is good for the acquirer and the acquiree. Not so surprisingly, it is good for the venture capitalists, the lawyers, the accountants, the investment banks. In other words, an acquisition has a positive ripple effect downstream that keeps the economy going!
Rewards for the Startup
In an acquisition, there is the obvious financial benefit, which is the gist of many lores. There is the sense of accomplishment, the pride and the satisfaction that comes from knowing that you beat the odds. Typically, this euphoria lasts for a up to a month. Following that, the grind starts all over again. The relentless nature of the industry is such that basking in glory is permitted for only a short time — and then it’s back to business!
For someone who has the unusual experience of founding a startup for the first time and succeeding, inevitably follows the usual experience of the headaches of upgrading lifestyles, worries (because now one can actually lose something tangible), the social aspect of the impact of the sudden wealth, and other success-related concerns.
Honeymoon With the Acquiring Group
Immediately following the acquisition, both parties maintain a very “artificial” decorum for fear of upsetting the apple-cart. This is the honeymoon period. As an acquiring company that’s been on both sides of this issue, we can confirm that all employees who interface with acquirers or investors are generally instructed to be on their best behavior. For instance, the CEO of the startup may be accorded lavish attention by senior management, even when they are extremely busy.
HR will respond to every question from the startup employees (which might be unheard of for its own employees). Also, behaviors that the public company would normally frown upon may be condoned (such as lavish picnics, free beer in the company refrigerators and other nonstandard boons).
Product Channels
Acquiring companies tend to make proud announcements, signaling their intent to enter a market (for example, Cisco-Selsius, Siemens-Argon), or broaden their portfolio (this occurs with most acquisitions) or to get a customer base (as Lucent-Ascend). Most often, the startup does see a significant up-tick in the demand for the product, a bigger customer-base or markets that the startup could not have entered on its own.
Often, the customer drives the acquisitions to begin with. When a company heeds its customers’ request, the customer feels good, the vendor feels they are doing everything to keep the customer happy, and the startup says hallelujah!
Customer Visibility
Very often, startups are targeting a market in which the customer is uncomfortable buying from a startup. The telecom arena has traditionally been such an arena. Although times are changing, it is still difficult and or time consuming for a startup to proceed from “I like the product” to the “Here is the purchase order” stage. An acquisition can cause “potential” customers to accelerate their plans for the product.
The Bad
Like all good things, an acquisition has its side-effects. Some of them are bad — and others are plain ugly. Very little of the “bad” is ever discussed publicly, for obvious reasons. Well, let’s break open the locked cupboard and examine a few of the “bad” things.
Slow-Down in Pace of Work
One of the most dramatic let-downs of an acquisition is a palpable “slow-down in the pace of work.” A public company may acquire a startup, citing a high-energy group of people who can turn on a dime and who have developed a great technology or product. The startup developers feel they busted their chops to get acquired — and now it’s time to take it easy.
This issue has long-term ramifications on employee satisfaction and retention. In many cases, it is a case of mismatched expectations. The startup employees believe that the acquisition price is for work done thus far, not for future work. The acquiring company believes the price is to ensure a few years of aggressive development and product roll-out beyond the acquisition. The unvested stock is considered the leverage.
There are very few acquisitions that have not resulted in a “delay” in the product availability. In fact, competitors will respond to an acquisition by snickering that the product will shrivel and die as a result of the acquisition.
Acceptance Within Group/Division
With companies that do not have an aggressive acquisition culture, another common outcome of an acquisition is that some internal group becomes upset. This can be because they were developing a competitive product (which will now be canned) or the acquisition does not understand the internal culture and blazes away in typical startup fashion. Often, high tensions are due to the disturbance that it causes in the pecking hierarchy. Sometimes, it is due to jealousy: Acquired employees tend to be wealthier than existing employees, or some executive feels rebuffed because he or she was not consulted about the acquisition.
In all of the above cases, the effects range from dissatisfaction to dissension. Over and above loss of morale, these problems can cause more serious product and market snafus.
‘What it was made out to be’ vs. ‘What it is’
This classic “gotcha” takes two forms. First, the startup sells itself too aggressively to clinch the deal. For instance, the product is shipping to trial customers (though most real features are about six months away) and the product has been “baked” with customers (except they were using just one or two features). Often, the startup sells its engineering team too aggressively, implying the follow-on products would be a breeze.
Second, the champion on the acquiring company side may sell too aggressively internally, usually to win over the last of the holdouts or skeptics. While both techniques may aid in pushing through the acquisition, the penalty is paid later in the form of embarrassment — or worse still — in lost faith. It is best to sell the strong points and highlight the weaknesses clearly (which is easier said than done).
The Ugly
There are several parts of the acquisition process that are just plain difficult, arduous and ugly. Unfortunately, they also tend to be the unavoidable and important parts of the process. Often, being aware of them up front helps reduce the ugliness. There are two key aspects of post acquisition: HR aspects and integration aspects.
HR Aspect (Post-Announcement)
The HR aspect has several components including mapping health plans, 401(k)s, grades, titles, salaries, stock options and handling redundant positions and people.
Job Position Translation
Most startups tend to have very little structure, or too much structure. Many startups have a CEO, a VP of engineering, and a few other higher-level managers. Although this is sufficient for a startup, as a company grows, it needs more structure. On the other hand, when a startup has too much structure (created either because the CEO loves hierarchies or recruiting pressures), this leads to title compression at a big company. Title compressions can result in some hurt egos. Additionally, off-beat titles and job functions also cause the “system” to burp.
Additional ‘Handcuffs’
Typically, an acquiring company looks to “lock up” the people. It can achieve this in one of two ways: ensuring the folks have less than 50 percent vesting left or by throwing additional “locks,” such as additional stock options, bonuses or employment agreements.
These handcuffs are offered to few of the key employees; the percentage ranges from 5 percent to 15 percent of current employees. Often, it is difficult to select who is key and who is not; given that startups tend to emphasize the equal importance of all.
Attrition of Unnecessary, Overlapping Positions/People
There is no such thing as a completely complementary acquisition: the bigger the acquisition, the more the overlap in positions. The key folks that get hit in an acquisition are the sales, finance, HR and manufacturing groups. Interestingly, with the hot job market, companies today make an extra effort to retain good people, finding them a place at least somewhere within the company. If valuable employees cannot be retained, a package is worked out whereby either some stock vesting accelerates or a lump-sum payment is made. Often, the startup will have these clauses in their employment plans at the time of hiring. It is not advisable to change employment agreements around acquisition time. This can have tax implications, which can cause a deal to fall through.
What works best in attrition scenarios is to do it quickly and efficiently. Long drawn-out affairs tend to cause morale problems.
Integration Process
This is the problem of the backend. Simple things such as issuing POs, hiring, project launches, budget preparation and Manufacturing and Resource Planning systems can cause major hassles if they are not handled properly.
Development Environment
A startup typically has a less sophisticated development environment. Integrating these systems with the acquiring group is extremely critical to maintaining productivity through the acquisition, and later. For instance, most startups have fairly rudimentary bug tracking software, or ASIC development environments. The acquirer tends to have more resources and systems; training the startup developers in them as quickly as possible is critical.
Testing
For example, a good test lab tends to take time and money to build: both commodities that are in short supply for a startup. Transitioning the test environment is usually a wakeup call as well. Often, larger companies maintain a higher standard of rigor in testing than a startup. Changing the expectations to the new environment is an important aspect of acquisition. I have seen many acquisitions fail because the product was either introduced “prematurely” by the acquirer’s standards or was inordinately delayed while it went through the extensive tests, often missing the market window.
Marketing
Resolving marketing strategies can be a simpler obstacle to overcome, aside from the conflict of personal approaches. Product marketing tends to find its bearings quickly (given that the company was probably acquired for its products). Some of the marketing communications and technical writing functions tend to get a little lost in the shuffle, while the more important issues are integrating into the company’s product lines and positioning. One of the key roles that a startup’s product marketing can play is to raise the visibility for its products within the organization (sales, support, marketing organizations) and without the company as soon as possible.
How Successful Are Most Acquisitions?
Let’s have a look behind the curtains at the success factors at companies such as 3Com, Bay Networks, Cisco, Cabletron, Lucent and Nortel. When one lifts the hood of acquisitions, the dirty little secret that comes out is that most acquisitions are ho-hum at best – and, at worst, often utter disasters. A company that believes in an acquisition strategy plan is fully aware that most acquisitions do not work. In fact, a critical task is to ensure that failures at acquisitions do not slow down the acquisition momentum. Good examples of this are Cisco Systems, which has completed 36 acquisitions in the last six years, Lucent Technologies, with more than 12 acquisitions under its belt in the last two years, and Microsoft, with more than 20 to its credit in the last decade.
Often, companies start out with great momentum on acquisitions, faltering when they cannot make the acquisitions work or because they lack the currency to play the game. A classic example of this is 3Com, which started early in the acquisition game, and had a great hit with Synernetics. However, it could not digest some of the later acquisitions well and has slowed down considerably as it redefines its market strategy. Cabletron systems, which was an early leader in networking, was slow to get onto the “growth by acquisition” strategy; despite its earlier hiccups, it was successful with its acquisition of Yago Systems. Many of the European and Japanese firms have also woken up and acknowledged that their own labs and development groups were no match for the pace with which startups innovate. Interestingly, another area of networking where the pace of acquisitions has picked up is semiconductors. Broadcom and Intel have made several acquisitions within the last year. The simple reason is that the market is growing so fast that the only way to keep up is to acquire from outside to supplement the internal developments.
Analyzing failure is always an educational exercise. Give someone enough rope, and they may hang themselves — or they may catch a stallion. Constrain them, and although they won’t hang themselves, they’ll never catch a stallion, either. In summary, good acquisitions are characterized by a strong team, a hands-off market-driven approach and strong incentives to succeed.
