Topic of the day is "Cash out Start-Ups" written up in WSJ last week.
http://online.wsj.com/article/SB10001424052748703312904576146372229938338.html#ixzz1E9U9sazV
They say 50% of marriages end in divorce. Well 9 out of 10 mergers fail to increase shareholder value! While a M&A "Pre-Nup" might mitigate some of the complex causes of M&A failure it would not prevent fall-out costs of failure and ultimately break-up and / or re-organization costs of the merged entities. In that sense having an escrow period is more like the pre-marriage blood screening test or like a pro-athlete having to pass a physical. The original logic behind the marriage blood testing was to ensure neither party had syphilis. In the case of the Redskins it's to ensure that no Albert Haynesworth's make the team.....but I digress! ha!
In the Internet age, with a backdrop of "spectacular" failures (a la Time Warner + AOL) and simply poor synergy (eBay+Skype) it makes sense for an acquiring company to protect it's assets / brand before agreeing to a "marriage" Specifically:
1. Earnouts as a pay for performance. One of the major reasons these fail is that key personnel in the acquired company simply leave. This incentivizes them to stay (at least a while) with real "skin in the game."
2. Looking for a "quick buck." Horror stories of vapor-ware aside, some budding businesses entire model is based on the assumption that they will be acquired by a larger entity to build out / complete their product services and/or features. This doesn't necessarily prevent that strategy, but makes an entrepreneur think twice about its likelihood of success. Businesses that are self-sustainable will be more stable and attractive for any potential purchaser.
3. Valuation. As there is now a hurdle introduced in the M&A game this doesn't mean all the leverage in the bargaining position is in favor of the purchaser. The acquired company may use this as a reason to demand higher valuation, ask for shorter escrow time, etc. What this does do is force all parties involve to pause, think about the value-add for the merged entities and the likelihood of success. Does anyone know the divorce rate for Vegas marriages???
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Tonight we have TaxiMagic as our guest lecturer. It seems early adopters targeted are business travelers. Can't wait to hear the roll-out / expansion strategy!
I really like the analysis that is explained here, it is simple and easy to understand. After reading business articles about change for my accounting class, I think that could be applied here. If we change the way that we initiate the work we do, attempting an M&A, we'll have different more successful outcomes and increased shareholder value, which would benefit everyone involved in the end.
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