We have been doing some joint projects with Ann Marcus recently, who is a real pleasure to work with, and a very effective interviewer. She sat down last month with the CEO of a recently acquired software firm, who has asked to remain anonymous due to the candor of his remarks. There are some real lessons here for any startup contemplating the path to an acquisition.
This is the first in an ongoing series of “lessons learned” stories from founders: if you founded or were an early employee of a software startup and would like to contribute your story, please use the contact form or give me a call and we can arrange an interview.
Interview with a CEO of a recently acquired small company. 4-9-07
Ann Marcus (AM): Acquisition is becoming a useful strategy for many organizations. What did you see as the benefits of acquisition for your organization and the company that acquired you?
CEO: Exit was the key benefit. We were only an eight-person company. Being so small we had few resources but had a very good technology. We lost one person actually to the acquiring company just before the acquisition, but now that person is so to say back in the fold.
Because of the resource limitations, the crew was antsy and didn’t feel that we were moving forward. Also, being 65 I am ready for retirement. So we started looking about a year and a half ago for a company that would be interested in our technology (Design automation solutions using CAD as the output device). We wanted to find a company that would allow the technology to survive and let the shareholders to get some money out of the company.
There were two CAD companies that were good candidates:
The larger of the two candidates ($1 billion+) didn’t show much interest. The other somewhat smaller company (approximately $400 million) did. One of our products fits directly into their product portfolio and allows them to retain their competitive edge over their primary competitor who is offering similar technology.
AM: What aspects of the process did you not anticipate or plan for?
CEO: The heavy involvement of lawyers…I didn’t anticipate that would cost us roughly 10% of acquisition price in legal fees. For a small company, we couldn’t expect too high of a valuation, so for us 10% was a large chunk. That was painful.
I’ve done business in Europe and it’s very different. Europeans honor their gentleman’s agreements. Here, the lawyers, rather than the business people on each side, negotiated the entire deal and that doesn’t seem quite right. The Acquirer really forced this situation. Our lawyer warned us early on that even if we try to keep things simple, it will still get complicated; people are going to require all kinds of indemnities and there will be all kinds of negotiations. There were. It was painful not only because it was expensive but also because it took so much time.
So I’d advise someone about to embark on this path to be prepared for a lot of business machinations and a lot of attorney involvement. And even more to the point, if your business is doing well and you don’t have a compelling, immediate reason to sell it, then don’t. Keep it going. Sure, you can test the waters, but don’t sell unless the price is really right and you can settle on terms that work for you. Being a small entrepreneurial company can be fun. In big companies, things seem to freeze and don’t go anywhere.
AM: So, you have stayed on with the Acquirer?
CEO: I promised to stay on for one year; the primary techs signed on for 2 years and we have a non-compete agreement for a year after that period. My job now is really to promote our company, its people, and its technology inside this bigger Acquirer…but it seems the techs are already frustrated of the low level of interest. I do what I can to fix this but in reality I’m just waiting to get out as I have a really hard time to get anyone to listen.
AM: Were there other elements that were unexpected?
CEO: I sensed that there were issues prior to acquisition; the business people seemed to take very little interest in our business which seemed odd. And once the letter of intent was signed, that didn’t change. Our lawyer said that part was unusual. It most cases, according to him, acquiring companies want to secure the arrangements and the relationships before the deal goes through so they act as though they are courting them. But in this case there didn’t seem to be a very strong level of interest other than a willingness to go through with the acquisition. And it seemed that even some of the positive pictures the new company painted have turned out to be pie-in-the-sky stuff…they haven’t really followed through on them.
I told them many times that they should bring our people in on their ideas and visions and let them know what expectations they had, but it really never really happened. I asked that there be some sort of forum where the acquiring company would let our people know what they would be doing in the future. As you can imagine in a small company of eight people, everyone has a key position who know that what they’re supposed to be doing and that their contribution is important to the entire team. In my opinion it is very important to understand that when you are buying a company, it’s the people that are most important…not the code they’ve written. It is unfortunate that our people weren’t handled with care. The Acquirer did finally, as an afterthought, create what they called a “Retention Bonus” however to prevent the non-shareholder technologists from leaving.
AM: In what way would you advise others prepare to avoid the challenges you encountered–words of wisdom, tips, etc.?
CEO: You need to have a clear vision of what are you going to do with you own company; something that you can use as a guide to follow up on and measure against.
You need to keep your people as well informed as you can. In our case, we tried to keep our people informed, but then we weren’t getting much information back from the Acquirer, so our people waited and waited but no much information was forthcoming. Since the Acquirer is privately held, they didn’t want to reveal too much.
AM: Did you find that it created uncomfortable working conditions for you and your people?
CEO: Well it has only been two months, and yes, it has been difficult; I am constantly trying to update my new boss on what should be done, what should be fixed, what should be communicated…essentially defending my troops. I should have been better prepared for the changes that were coming…it’s a large company that grows by acquisitions. You would think that they would make integrating people an important part of their process, since they seem to do this all the time. But because the staff is made up of people who have all been acquired, there is little cohesion. And management there is fairly lean. A company isn’t a unified thing, it’s a bunch of people and if those people aren’t prepared, if they haven’t been properly trained to train others and make newcomers feel welcome, then who knows what will happen.
AM: What went well?
CEO: Well, we’re just two months into the process. I have been working directly with the Company’s sales people. Money talks. My thinking has been that if they sell some of our products then my team will get more of the focus they need, because the Acquirer will then take more notice of what we’re doing, or trying to do. We are also approaching our existing customers and asking them to discuss our products with the Acquirer’s key sales people. I bring them on sales trips to our customers and of course, the sales people will have an interest in what the customers are doing, what they say and what they need. We’re essentially using our customers to get the company to treat my team well. To do it any other way doesn’t seem to work…
AM: What insights will you take away from the experience?
CEO: If I hadn’t been in the present situation (needing to retire and the company short on resources), I wouldn’t have promoted this option as strongly across my company.
There were signs of problems prior to the deal. I had and still have the sense that there is no real interest in what we are doing, but they just needed us for the competitive advantage. Just another check mark.
Since we had such limited time, when it came to due diligence, the time was used to prepare our stuff for them. We didn’t really have time to do much background research on the Acquirer and find out about the individuals and the company culture. Even when we did request information it wasn’t forthcoming or was delivered in wishy-washy answers.
If I had it to do over again, I would likely convince those remaining to hold on to the company and make a go of it as it was. And if I weren’t retiring and had had more time, I would have been more thorough in having my discussions with the Acquirer’s business people who should have be interested in our people and our technology, rather than just discussing with their attorneys. That way I would have known that these guys really don’t have a sufficient level of interest.
I guess that if situation was different, and I had to do it over again, I wouldn’t
AM: What are some of the significant challenges / opportunities that still remain?
CEO: My remaining challenge for me is to be the promoter of my people, their skills, and our technology in this larger organization and find a place for them where there is an understanding of their importance.
AM: Thank you!