Keys to Successful M&A: Transparency, Security, and Process

Editor's Notes

• #11: Look closely at the Top Acquirers last year. First off, Google has been really dominant, setting new records for number of deals each year. Often,picking up technology in seemingly unrelated areas. They realize that it is worthwhile to use the cash, make some strategic bets as in house new developed technology has about the same mortality rate as any new small business – 90 failure over the first five years. Much easier to make acquisitions of proven technologies.We deal with Google all the time, we’ve had them as guest speakers and on panels, such as our annual report we passed out.Not only are they doing more deals, but they’re buying differently, too. When Google comes into an LOI, they will actually lay out issues you would normally be negotiating, stressing overlater on. Their attitude is “Here’s some things that we’re going to be having trouble with, we’ll tell you how we’re going to handle it.” They just get by all that stuff. They realize that their sheer size and the drain of the process can destroy the relationship during due diligence by creating “deal fatigue.” Which is the biggest single killer of deals in process these days.After Google, we see Intel, who we just sold a Korean company too. In fact we’ve got offers from or sold to all of these firms. What’s interesting to note is how the leader board has changed. Up to a couple of years ago, it was the same names over and over. Microsoft, Cisco, IBM, etc. Now the leaders are firms that didn’t exist a few years ago, who began making news on the M&A front when they were private – firms like Zynga and Facebook. With the new crowd funding law, we will see more of these private firms with plenty of cash bidding.Then we have firms many of you have never heard of, now outbidding the giants. Have you heard of WPP or Schneider Electric? What’s not shown is all of the newly minted foreign public companies who went public on international exchanges. First thing they do with the cash from their offering is make acquisitions. Not only to get access to technology and domain expertise, but often, more importantly, to acquire a ready made base in major markets in North America and Europe to expand sales.Further, foreign buyers want to get access to user bases where they can leverage their low cost development staff. For this reason, even the most legacy, old line firms are seeing suitors these days
• #12: Another major trend affecting M&A is the record cash hoards at the large tech companies in the U.S. Take a close look at this chart. Amazingly, this increase in cash, up to ten fold for some companies occurred during the Great Recession. Tech companies just kept motoring along, generating nearly a quarter trillion in cash.So what do you do with all this money? The interest rates are negligible.You either put it into development, you give it away in the form ofdividends, or….you buy somebody. But it’s not that simple – look where the money is – see the “held offshore column” to the right? Take a look at Cisco for example. 89% of that money is off shore. Microsoft is 85%. On average for tech giants, 70% of their cash is off shore. This is true of most multinational American companies. The United States is only about 6% of the worlds population, so the bulk of the revenues and profits will be in sales outside the U.S. – revenue that is taxed at a lower international rate. All in offshore banks. But, this money can’t be repatriated without paying full income taxes on top of the taxes they paid in offshore jurisdictions – this means up 40% additional taxes counting the state’s cut. These funds can’t be used for development in the U.S. The money can’t be loaned to the American parent. In fact, you can’t even buy stock in an American company or U.S. real estate, even through a trust. These funds were made offshore and must stay offshore unless Congress comes up with a tax holiday.Thus, the money has to be used for investment or acquisitions of foreign companies.Remember Skype? Microsoft was chided for overpaying by spending $8 Billion for the Skype. But, they had over $50 Billion at the time, burning a hole in their pocket – funds they needed to put to work. Given that, Skype looks like a pretty good acquisition. Look for a lot more international deals by American acquirers.
• #46: 2-way street.Buyer will have an extensive DD checklist, but you should do your own DD too. Ask for references. PE firm recently provided a list of every deal they’ve every done! Call these other buyers to see how things worked out?How to you do deals? How structure, how integrate, retention, layoffs – ask them early.ATTACHMATE story. Cort Directions story.
• #47: 2-way street.Buyer will have an extensive DD checklist, but you should do your own DD too. Ask for references. PE firm recently provided a list of every deal they’ve every done! Call these other buyers to see how things worked out?How to you do deals? How structure, how integrate, retention, layoffs – ask them early.ATTACHMATE story. Cort Directions story.