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Preparing for M&A Based on Current Trends

The last five to ten years have seen tremendous growth in M&A activity, namely due to advancements in technology - the mother of all industry disruptors. Not surprisingly, then, there has been a specific increase of software related M&A activity. 

What are the catalysts for these current trends?

Expert practitioners agree there are three main reasons for this increased activity:

  1. The move to the cloud. The move to the cloud has affected all industries. All companies are now tied to the tech world; all companies are essentially software companies. We see this trend when working with banks, for instance. Banks cannot seem to hire engineers fast enough to meet their technology needs.
  2. Open source business models. The move to the cloud has affected how software is written, deployed, consumed, and sold. Software used to be written in-house by a specific team, in a waterfall workflow. Now we see there has been a shift to open source software. Consequently, all software is not developed in-house. This shift to a more open source software environment leads to our next trend, healthy funding.
  3. Healthy funding. There is an enormous amount of money coming into the technology space, partially due to the open source software model. With more funding comes more companies in the ecosystem, which correlates to increased M&A activity.
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How Should Companies Prepare For An Acquisition Based on The Current Trends?

An understanding of current trends can be extremely beneficial to practitioners; however, this understanding is not enough to help them engage in truly meaningful M&A ventures.  

With the above trends in mind, accomplished practitioners agree there are specific ways acquirers and sellers should prepare for an acquisition in today’s climate. 

For the acquirer:

  • Make M&A part of your DNA. It is especially critical for the acquirer to make M&A part of your DNA. This means having a solid, organized, well-oiled pipeline. Here, technology comes into play again as M&A project management platforms and VDRs can assist with pipeline management. 
  • Develop a 3 year road map. Part of developing a robust deal pipeline and deal sourcing is first understanding your company’s specific goals. This means you will want to create a three year roadmap that includes your objectives based on a clear understanding and analysis of where the market is going. Consider what you will need to build, buy, or partner with others. 
  • Build genuine relationships with targets. Using your three year roadmap, generate a comprehensive list of potential target companies. As you begin to connect with them, you must rely on robust deal sourcing skills to truly get to know them. Nothing can replace establishing genuine relationships with your targets and truly understanding their businesses. 

For the seller:

  • Make M&A part of your DNA. Experts again agree making M&A part of your DNA is essential. More specifically, understanding the M&A process and continually planning for it makes sellers stronger, more appealing targets. 
  • Understand when it is a good time to sell. Perhaps the most important thing for a seller to determine is when it is a good time for them to sell. 
  • Determine what type of sale you are looking for. Based on current industry trends, sellers need to ask themselves if they desire a technology and team sale or the sale of a technology business. 

Both points 2 and 3 will determine how quickly you start going out and creating M&A relationships. 

  • Establish your value proposition. Establishing your value proposition is obviously essential when thinking of selling your company. Here you will need to take a look at the market and current trends to also determine what acquirers in the current market would be willing to pay for your company. 
  • Build genuine relationships with potential buyers. Similar to the buy-side, the seller also needs to build genuine relationships with potential buyers in order to eliminate wasted time and resources.
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Current Best Practices for Diligence and Executing Deals

For the acquirer:

  • Have your diligence team ready. Perhaps the most important thing for the acquirer to remember when preparing for diligence is to have your diligence team ready to go at all times and to be sure it understands the strategic rationale behind your M&A practices and the potential deal. This will not only keep the deal proceeding at an appropriate rate, but also make it easier to identify potential red flags during diligence. 

For the seller:

  • Have a buttoned up management presentation ready. This buttoned-up management presentation should include essential information regarding the company, its value proposition (and its value proposition in comparison to competitors), and financials. 
  • Have a clear understanding of financials. It is of considerable importance for the seller to have all of his/her financials in order. A solid understanding of financials should be pressure tested because acquirers will be asking for various cuts of data, all of which need to line up with one another. Poor understanding and presentation of financials can truly harm a seller’s position. 
  • Understand your IP. Surrounding IP, be sure you understand your code and can answer questions regarding code scans. Having strong IP counsel is also desirable. 

For both:

  • Consider who else needs to be involved as the deal progresses. Finally, both sellers and acquirers need to understand who needs to be included as the deal progresses. Initially, it is the CFO, CEO, or perhaps the head of sales, but as you move to due diligence this list grows - perhaps to including IP counsel and legal counsel, for instance. Because diligence is such an intense phase, it is wise to prepare as much as possible up front. 

What currently determines if you manage a deal in-house or go to an investment bank?

The broadness with which you want to go to the market really determines whether you manage a deal in-house or turn to a bank. If you want to go broader (into new industries/ecosystems, new geographical territories such as new countries…), a bank can be helpful as it can cast a wide net while helping you maintain confidentiality so rumors are not swirling that you are looking to sell.

Banks can also be helpful as you get inundated with requests from various buyers since they can take some of the demand and work off your shoulders. 

As the Deal Progresses When Should You Bring in a Third Party?

M&A discussions can certainly be in limbo for long periods of time, so it can be difficult to determine when to bring in a third party. Currently, a strong rule of thumb is to bring in the third party when you begin discussing the term sheet.

While term sheets are non-binding, if both the buyer and seller are agreeing to terms, it can be concluded that the deal is getting serious. Most practitioners agree once you sign a term sheet, you want to follow through. 

When talking to a competitor, you need to be transparent. Additionally, start slowly. Only have the other side tell you what they want you to know. Certainly you need to collect specific information, but take the conversation slowly and begin with only what you need. 

Final Thoughts

Technology, specifically software and the move to the cloud, have transformed the world of M&A. Keeping an eye on current trends and the market is essential to strong M&A practices. 

Additionally, practitioners echo the following sentiment: when you begin meeting with a competitor, be transparent, but take things slowly...only collect the information you need, only share the information you want the competitor to know, and encourage the competitor to do the same. 

Taking things slowly and being on the same page will yield stronger results in the end.

It is also beneficial to equip your team with the best tools possible. M&A corporate development software, like DealRoom, enables teams to efficiently collect, store, and share information internally and externally.

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