What's the perfect takeover target for the world's largest tech companies? And why could your choice of VC funding put them off? Keith Rodgers reports from San Francisco
If your long-term game plan is to sell your tech company to a vendor like IBM or Oracle, you've got to think big - but not too big.
For seasoned corporate acquirers, the profile of the ideal tech target seems to be 'small but imperfectly formed'. What the likes of IBM are really looking for is solid technology and the first vestiges of customer acceptance: what they don't want is a company that's spent time and resource building a large manufacturing and sales infrastructure which is only going to get dismantled when the deal's done.
This was one of the conclusions from a panel of corporate acquirers at the 16th annual Venture Capital Investing conference in San Francisco in early June. In a discussion peppered with pointed attacks on venture capitalists from one speaker - 'you can't believe [the worst of them] actually function as humans' was the choicest remark of the afternoon - five senior representatives from acquisition-hungry vendors mapped out the factors that can make or break a deal.
One of the more sedate voices belonged to David Johnson, worldwide head of corporate development at IBM. The company recently analysed the performance of 25 acquisitions it's made over the last two years, determining that in the last twelve months half of them far exceeded the targets laid out in the original business case for acquisition, with a further 25 per cent hitting target and the final 25 per cent falling short. Johnson pointed out that IBM's success rate has been highest at companies where the product was proven and there were two or three customers on board to demonstrate proof of market acceptance (or more if sales are made through partners). But 'if they've developed manufacturing, sales, and G&A [general and administrative expense], quite frankly that's somewhat redundant to IBM. It's the development team we want, the product, the technology.'
That view was echoed by Doug Kehring, senior vice president of corporate development at Oracle. While the company's acquisition record is dominated by its controversial, 18-month long hostile pursuit of rival PeopleSoft, it can also point to this year's takeover of Oblix, a relatively small IT developer specialising in identity management and web services management, as proof of its taste for smaller businesses. Kehring identified tech companies with revenues of $2m to $20m as the 'sweet spot' for Oracle. Over $20m, there's a danger that the company will be over-investing in sales because it doesn't have the scale of distribution that a vendor like Oracle has or may be chasing a mature market where similar companies are up for sale.
Similarly, Adam Spice, vice president of business planning at Broadcom, a $2.5bn turnover communications semiconductor company, pointed out that of the 30 acquisitions he's been involved with, only one had significant revenues (of over $100m). The rest had turnover of less than $10m, or in some cases none at all. One thing they did have in common, however, was working product.
Other key criteria identified by the panellists for acquisition targets included:
� Culture. IBM identifies this as a significant part of its due diligence process
� Choice of platform. The right fit will minimise integration issues, while the wrong fit will usually rule a deal out
� Ownership of intellectual property. This is a particular concern in the open source environment
� Importance of speed to market. This will influence their decision whether to buy product or build their own
So what about the vitriol poured on the VC community by one of the panellists? In some respects, it's simply a question of different objectives: IT vendors have strategic motives for investments and are prepared to pay a price, while VCs focus primarily on the financial outcome.
But for Broadcom's Spice, there's more to it. 'I've rarely seen VCs add value,' he said. 'When we acquire, typically they get in the way.' He believes many VCs fail to talk to customers, get caught up in CEOs' sales stories and fail to manage the earn-out expectations of tech companies' senior management. Similarly, he's experienced conflicts where one VC sits on the board of two prospective targets that Broadcom's looking at in the same sector. Perhaps not surprisingly, of all the investments made by the company over the last five years - including two companies in Cambridge - not one was brought to Broadcom by a VC; rather, its own customers or engineers flag up potential deals. 'We've worked with some very reasonable [VCs],' Spice concluded, 'but at the other end [of the scale], you can't believe they actually function as humans.'
There's little technology companies can do to temper any friction between their VC partners and potential purchasers, but it's worth bearing in mind some of the possible fallout. IBM's Johnson, while not commenting on Spice's views, pointed out that technology acquisitions are all about simplicity and speed - so the moment you have multiple VCs in a deal, each with their own sets of lawyers poring over contracts, you're likely to have a problem. Get more than three VCs in a deal, he says, and it will add three to twelve weeks' delay to the completion process.
Keith Rodgers is content director of Webster Buchanan Research (www.websterb.com)
Monday, July 24, 2006
Friday, July 21, 2006
Keys for managing business risk
Why would a large, well-established company gamble everything by purchasing business-critical technology from a start-up?
When Christopher Crowhurst signed a contract with a specialist software developer in the fast-emerging field of web services, it was the end of an exhaustive selection process and the beginning of a slightly unusual supplier-customer relationship.
Crowhurst's company, computer-based assessment provider Thomson Prometric, had spent 14 months assessing its technology options before deciding to put its faith in the start-up software vendor, Actional. As vice president and principal architect, Crowhurst knew Thomson's fortunes - and the success of a strategic $5 million IT project at his company - would become inextricably tied to the vendor's viability. Success wouldn't just be down to functionality, implementation skills, technical prowess and the other factors involved in making any IT system operational - it would also be down to the supplier's ability to sell the same system elsewhere and so stay in business. And although Actional, a specialist in Service Oriented Architecture technology, has since notched up multiple live customers, at the time he began the selection process no referenceable customers were in production.
Crowhurst's informed gamble on Actional was an extreme but telling example of the factors that come into play when companies purchase strategically-important technology from small, relatively young vendors. In any market where much of the pioneering work is being carried out by venture capital-backed specialists, organisations that require bleeding-edge technology have to take two tightly-connected risks. Firstly, they need to be sure that the technology is stable and does what it's supposed to do - and secondly, they need to know the vendor will be around for long enough to keep on developing it. Larger vendors inevitably seize on this issue, so helping purchasers take steps to mitigate risk could be the difference between a start-up clinching and losing a sale. That's one reason why two staple components of any specialist vendor's marketing presentations are updates on the latest round of funding and a run-through of new customers.
What Crowhurst and others have done is push back the boundaries of the research process typically undertaken by customers prior to making a purchase. Beyond addressing features and functionality, most tech start-ups would expect their sales prospects to do some kind of financial due diligence prior to making a strategic investment. But it may not stop there. They may also want to meet the supplier's finance director and its venture capital backers, and check the composition of the board to ensure it's got the right balance of VC, strategic, financial and operational input. One customer that made a similar purchase to Thomson also drilled down into its vendors' middle management and engineering capability. This should all connect back to a strong visionary - getting a company with committed founders and a CEO who's passionate about the organisation, not just treating it as their next job. In addition, the start-up's technology and marketing partners will also be a factor.
Crowhurst suggests that the level of commitment shown by key individuals within the vendor company can be measured in several ways. He believes in spending face time with key players from the CEO down - in fact, he spent three days at Actional's headquarters, part of what he believes is a vital process to get beyond the salesperson. 'I developed a relationship with the CTO of Actional and have managed to influence development of the product - with some other organizations, we couldn't get beyond the sales folks,' he says. 'You need to get to the engineers, feel you can trust them.'
But he also argues that suppliers give much away by their own actions (or lack of), pointing to standards bodies as a good example. It's not enough for an organisation to be in a standards body - it's about being engaged in the body. Crowhurst subscribes to a number of standards bodies' newsgroups, which gives him insight into which organisations are active within the body, rather than merely taking up membership because they feel they ought to.
The flipside of managing the risk associated with a start-up is that there are many positive reasons for buying from a smaller business. For one thing, it's the smaller specialists that tend to set the pace in emerging technology sectors, leaving larger vendors playing catch-up. In addition, they can offer a different kind of purchasing experience. James Brewis, managing director of expenses management vendor Signifo Expenses, points to a deal his small London-based company won against a large US rival. 'On our side there was the usability, the greater speed and lower cost of implementation,' he says. 'On their side was all the bells and whistles functionality and the fact they were an established player with significant revenues.' The customer believed that the former offset the risk. 'As a business owner and an entrepreneur, you've got to be prepared to get in there and ask the customer to take a chance on you - to tell them you'll do everything in your power to meet their needs and ensure the highest level of satisfaction,' says Brewis. With local, London-based sales and support, he also believes he can provide a level of service and focus that some global players may struggle to match.
Inevitably, the process of winning over customers is time-consuming. Even after selecting Actional, another six months passed before the deal was signed as Thomson's internal team set out to convince the corporation that it was the right decision and developed the financial justification. During that time, several other Actional customers went into production, which helped boost confidence. Crowhurst's team also documented a back-up plan during its internal capital approval process in case of problems: because Actional uses a standards-based platform, the team was able to demonstrate that it would be fairly straightforward to take the Thomson configuration and implement it on another platform.
Ultimately, however, winning over this kind of customer may have benefits that go beyond mere revenue. 'I have an interest in [Actional's] success,' says Crowhurst. 'I promote the project quite ferociously - I need other people to buy into the technology. I'll gladly be an advocate - they're a great organization and I've worked with them extensively.' Deeds speak as loudly as words, and the fact that customers have tied their fortunes to a particular vendor for strategic projects is an important vote of confidence.
This article is developed from a feature that originally appeared in 'Loosely Coupled's Monthly Digest', a subscription-based newsletter offering in-depth reporting and analysis for early adopters of SOA and business process automation.
When Christopher Crowhurst signed a contract with a specialist software developer in the fast-emerging field of web services, it was the end of an exhaustive selection process and the beginning of a slightly unusual supplier-customer relationship.
Crowhurst's company, computer-based assessment provider Thomson Prometric, had spent 14 months assessing its technology options before deciding to put its faith in the start-up software vendor, Actional. As vice president and principal architect, Crowhurst knew Thomson's fortunes - and the success of a strategic $5 million IT project at his company - would become inextricably tied to the vendor's viability. Success wouldn't just be down to functionality, implementation skills, technical prowess and the other factors involved in making any IT system operational - it would also be down to the supplier's ability to sell the same system elsewhere and so stay in business. And although Actional, a specialist in Service Oriented Architecture technology, has since notched up multiple live customers, at the time he began the selection process no referenceable customers were in production.
Crowhurst's informed gamble on Actional was an extreme but telling example of the factors that come into play when companies purchase strategically-important technology from small, relatively young vendors. In any market where much of the pioneering work is being carried out by venture capital-backed specialists, organisations that require bleeding-edge technology have to take two tightly-connected risks. Firstly, they need to be sure that the technology is stable and does what it's supposed to do - and secondly, they need to know the vendor will be around for long enough to keep on developing it. Larger vendors inevitably seize on this issue, so helping purchasers take steps to mitigate risk could be the difference between a start-up clinching and losing a sale. That's one reason why two staple components of any specialist vendor's marketing presentations are updates on the latest round of funding and a run-through of new customers.
What Crowhurst and others have done is push back the boundaries of the research process typically undertaken by customers prior to making a purchase. Beyond addressing features and functionality, most tech start-ups would expect their sales prospects to do some kind of financial due diligence prior to making a strategic investment. But it may not stop there. They may also want to meet the supplier's finance director and its venture capital backers, and check the composition of the board to ensure it's got the right balance of VC, strategic, financial and operational input. One customer that made a similar purchase to Thomson also drilled down into its vendors' middle management and engineering capability. This should all connect back to a strong visionary - getting a company with committed founders and a CEO who's passionate about the organisation, not just treating it as their next job. In addition, the start-up's technology and marketing partners will also be a factor.
Crowhurst suggests that the level of commitment shown by key individuals within the vendor company can be measured in several ways. He believes in spending face time with key players from the CEO down - in fact, he spent three days at Actional's headquarters, part of what he believes is a vital process to get beyond the salesperson. 'I developed a relationship with the CTO of Actional and have managed to influence development of the product - with some other organizations, we couldn't get beyond the sales folks,' he says. 'You need to get to the engineers, feel you can trust them.'
But he also argues that suppliers give much away by their own actions (or lack of), pointing to standards bodies as a good example. It's not enough for an organisation to be in a standards body - it's about being engaged in the body. Crowhurst subscribes to a number of standards bodies' newsgroups, which gives him insight into which organisations are active within the body, rather than merely taking up membership because they feel they ought to.
The flipside of managing the risk associated with a start-up is that there are many positive reasons for buying from a smaller business. For one thing, it's the smaller specialists that tend to set the pace in emerging technology sectors, leaving larger vendors playing catch-up. In addition, they can offer a different kind of purchasing experience. James Brewis, managing director of expenses management vendor Signifo Expenses, points to a deal his small London-based company won against a large US rival. 'On our side there was the usability, the greater speed and lower cost of implementation,' he says. 'On their side was all the bells and whistles functionality and the fact they were an established player with significant revenues.' The customer believed that the former offset the risk. 'As a business owner and an entrepreneur, you've got to be prepared to get in there and ask the customer to take a chance on you - to tell them you'll do everything in your power to meet their needs and ensure the highest level of satisfaction,' says Brewis. With local, London-based sales and support, he also believes he can provide a level of service and focus that some global players may struggle to match.
Inevitably, the process of winning over customers is time-consuming. Even after selecting Actional, another six months passed before the deal was signed as Thomson's internal team set out to convince the corporation that it was the right decision and developed the financial justification. During that time, several other Actional customers went into production, which helped boost confidence. Crowhurst's team also documented a back-up plan during its internal capital approval process in case of problems: because Actional uses a standards-based platform, the team was able to demonstrate that it would be fairly straightforward to take the Thomson configuration and implement it on another platform.
Ultimately, however, winning over this kind of customer may have benefits that go beyond mere revenue. 'I have an interest in [Actional's] success,' says Crowhurst. 'I promote the project quite ferociously - I need other people to buy into the technology. I'll gladly be an advocate - they're a great organization and I've worked with them extensively.' Deeds speak as loudly as words, and the fact that customers have tied their fortunes to a particular vendor for strategic projects is an important vote of confidence.
This article is developed from a feature that originally appeared in 'Loosely Coupled's Monthly Digest', a subscription-based newsletter offering in-depth reporting and analysis for early adopters of SOA and business process automation.
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