February 3 2011
by Todd Hixon

When To Say Yes

2011 promises to be a good year for exits:  economy healthier, stock market up, IPO window open, big tech companies with strong earnings and cash piles. Expectations for sorely-needed big exits are rising.  I hope that happens.  But let’s stay sober.

I’m struck by how often venture boards overplay their hands in M&A negotiations.  I’ve seen far too many companies turn down decent offers and accept a lower offer a couple of years later.  I know companies that took an early offer and have no regrets years later.  And I have trouble finding a case where taking a good offer was a regret.

Basically it’s a matter of numbers.  There are about 5,000 venture-backed private companies in the U.S., and the pool of buyers has shrunk as sectors like software and telecom equipment consolidated.  Glorious exits are rare:  on average from 2006 to 2010, 50 companies went public every year (1%), 360 were acquired (7%), 68% remained private, and 24% disappeared*. About 60% of reported acquisitions are at values below 4x capital invested (see chart below).  The unreported deals are mostly at lower values.

Acquisition Values; Source: Thomson-Reuters/NVCA

The hard question is, if you get a decent offer, how do you know if you should “say yes” rather than seek a better value by walking away, stalling until you can round up another bidder, or aggressively arguing that the offer is too low.

Here are some questions to ask yourself and your colleagues in the board room.

  • Is there likely to be a second offer that competes with the offer in hand?  I like to say that two offers is far more than twice as good as one: you have a real chance to get the price up.  But, how realistic is that?
  • How determined is the acquirer to get the deal done?  Is it vital to their business?  Is there another path they can follow?  Does it have a strong executive sponsor?  Is the CEO bought it?
  • How risky is the deal for the acquirer?  Does it stress their balance sheet or put their quarterly earnings growth at risk?  Have they done a deal of this scale and complexity before?

If there is a small chance of a competing offer and the risk of losing the deal is high, focus on closing.  Without seeming hasty, get to yes on the term sheet, get the process in motion, and keep selling to the acquirer’s management team:  buyer’s remorse at the church door is common.

Preparation can help you make the right decision and close the deal.  Work out who the key potential acquirers are, get to know them, determine their level of interest. Sometimes they will suggest the value they put on your company. And be ready to be in play:  have the audit done and the main parts of a data room at-hand.

There’s an old Wall Street saying that I like to keep in mind:  “bulls make money, and bears make money, but pigs get slaughtered.”

*My estimate based on NVCA data.

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