Mergers & Acquisitions

Understanding the Target’s Perspective in Tech M&A

Consider the following questions before embarking on the acquisition of a technology company.
Jens Kengelbach and Decker WalkerOctober 5, 2017
Understanding the Target’s Perspective in Tech M&A

Traditional companies and tech firms have plenty of differences. Business models, cultures, metrics, compensation schemes, and ways of working are just a few. The match between a large, often bureaucratic corporation in a traditional industry and a nimble, fast-moving startup often appears ill-conceived. Yet in 2016, more than 8,800 tech firms found new owners or major investors, approximately 70% of which were outside the tech sector.

Tech startups often have specific reasons for selling to a nontech buyer. Those reasons go well beyond the financial aspects of the transaction. In our experience, the acquirers that make the effort to understand what the target’s management team is looking for and how it sees the fit with the new parent gain a big leg up in making acquisitions work. Considering the following questions before embarking on a tech transaction can help set expectations and smoothe the M&A process and post-deal transition.

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1. Why do so many tech companies sell to buyers from other sectors?

Money is one reason, of course. Founders and their backers often want to cash in, and in many instances, nontech buyers are often the ones that are willing to write the biggest checks. But multiple other factors come into play as well.

Decker Walker

Decker Walker

Industry veterans provide access to existing products and services that the technology firm would find hard to build out on its own. Established companies from outside the tech sector can provide access to new markets through their core product lines. Cruise Automation, for example, was able to deploy its autonomous-driving technology overnight through General Motors’ global vehicle base rather than retrofitting cars one by one.

Buyers from other industries also give targets access to an established customer base, enabling the target to leapfrog previous sales targets. When Walmart acquired Jet.com, for example, Jet.com gained access to the fast-growing e-commerce marketplace run by the world’s biggest brick-and-mortar retailer and added muscle to compete with such internet retail giants as Amazon.

Nontech partners provide the trust and brand recognition of an established major industry player. This enhances the target’s visibility and reputation as a reliable business platform. For instance, brand recognition for the app mytaxi rose with the first investment by Daimler in 2013, and today, mytaxi is the world’s most successful taxi intermediary, with more than 10 million downloads.

2. What do tech companies expect in the M&A process?

Agreeing on a deal can be complicated by the different perspectives that buyers and startups bring to the negotiating table. Often, the acquirer will ask hundreds of questions about the target’s business plan, with a strong focus on scaling up operations or boosting bottom-line profitability measures, while the target is much more interested in talking about top-line growth, new-customer acquisition cost, and churn rates.

Management presentations and expert sessions often leave both sides wondering if they are headed for a difficult future. A frequent issue is when the acquiring company’s M&A team has a limited understanding of the tech firm’s technical architecture, hardware, or software and how it can be integrated into the industrial player’s products and services.

“Successful acquirers often establish separate governance procedures and mechanisms for their tech acquisitions.”

Acquirers that are not tech companies can advance the process by showing an early understanding of the target’s technology, business model, and success factors. This is especially important in a competitive auction situation. Buyers should not rely on price alone to carry the day; they need to win over the target’s management team with a compelling case for synergy and a vision for the combined operations.

Jens Kengelbach

Jens Kengelbach

Open and candid discussions about potential culture clashes and how to solve them can help. Acquirers also have to clearly outline their cooperation and integration model for the target as part of the wider company, as this is frequently a key concern for the technology firm’s management.

3. What do tech firms expect after the closing?

Tech deals frequently founder because of misunderstanding over post-merger integration and how the target will operate once the deal closes. Target company management teams typically expect a high degree of continuing entrepreneurial freedom, which is what they are used to and which they (accurately) view as vital for top-talent acquisition and retention. These expectations often include maintaining the target’s standalone P&L and having the ability to financially motivate key decision makers in ways that do not fit into typical corporate compensation schemes.

Targets also look for their new parents to make decisions fast, often much faster than allowed by the lengthy decision-making processes that result from corporate policies and politics. Successful acquirers often establish separate governance procedures and mechanisms for their tech acquisitions.

Moreover, tech companies expect ready access to the acquirer’s product base and distribution network in order to achieve early, tangible win-win results. One big reason for failed technology acquisitions, in our experience, occurs when the acquirer treats the target’s technology as a pilot or as a fig leaf for the acquirer’s tech agenda, rather than as a means of strengthening its core business.

Decker Walker is a Chicago-based partner of The Boston Consulting Group and North America leader of its M&A practice. Jens Kengelbach is a Munich-based partner, global head of M&A, and leader of the BCG Transaction Center. They are also co-authors of BCG’s newly released 2017 M&A report, The Technology Takeover, on which this article draws. The authors gratefully acknowledge Georg Keienburg and Timo Schmid, who contributed to this article and the report.

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