Master Strategies for Successful M&A

What a difference a few months can make. Just a year ago, technology companies were basking in the glow of unprecedented economic growth. Every week, dozens of successful Initial Public Offerings (IPOs) were launched, raising hundreds of millions of dollars for young technology companies. Today, of course, it's a different ball game. The IPO markets have virtually shut down, with investors becoming increasingly hesitant about financing technology companies.

Despite of the bleak IPO news, money is still available to technology companies -- technology executives just need to know where to look for it. While the IPO markets have tightened dramatically, the mergers and acquisitions (M&A) marketplace has stepped into the breach. In fact, M&A activity in IS outpacing  the previous year activities by nearly 70 percent, with technology companies accounting for nearly half of all the year’s activity. While the M&A marketplace slowed down a bit at the first quarter of current year, there are still many businesses interested in acquiring good technology companies. In fact, given the supply and demand imbalance in the capital markets, 2008 has the potential to be another record-breaking year for mergers and acquisitions.

M&A strategies can offer a number of benefits to technology companies seeking an exit or liquidity strategy for their shareholders. One significant advantage is that the M&A transaction is less expensive than an IPO. Whereas IPO underwriters often charge companies 7 percent or more of the total value of the offering, M&A fees normally run 2 to 5 percent of the transaction value. In a large deal, this can represent a huge savings.

M&A strategies present additional benefits, as well. For instance, M&A activity can make capital markets more efficient by bringing buyers and sellers together to maximize business values. Of course, the most significant advantage is that M&A strategies can offer access to an alternative source of liquidity.

Companies need to do two very important things before they can pursue an M&A strategy -- they need to establish themselves as good prospects and they need to find the right partner.

While the M&A marketplace is still very active, it is tighter than it was just a few short months ago, when companies only had to have a good business plan to get acquired. Today, while a good plan is essential, companies also must demonstrate strong leadership teams and a clear path to profitability (P to P).

Another critical funding factor that should be reviewed by a company’s executives prior to selling is their company’s cash reserves. The typical M&A process takes between five and nine months. If the seller does not have sufficient liquidity to fund itself during the process, the prospect for a successful transaction are greatly reduced since a company is forced to sell for liquidity as opposed to selling for value.

To judge whether two companies are a good fit, several questions must be answered. First, do they operate in similar or complementary spaces? Similarly, do the two companies have similar business philosophies and visions regarding how they will operate in the evolving space? And do both companies share the same expectations about where the marketplace is headed and how best to take advantage of opportunities that are being presented? Once an acquisition is completed, both the buyer and the seller must be able to seamlessly integrate into one unit. This can only happen if both companies have comparable operational styles and visions.

For many technology companies, a properly implemented M&A strategy can represent the best means for generating shareholder liquidity while further creating additional operating resources for continued success.

However, the sale process must be handled properly from the beginning. If companies select the wrong partner, or aren’t successful in their efforts to complete a merger or acquisition, they often don’t get a second chance. Particularly for companies with limited capital, making the right choices can be a matter of corporate viability and survival.