In 2020, conglomerates around the globe are expected to continue gobbling up tech upstarts – whether in an effort to modernize distribution channels, improve enterprise security, integrate Artificial Intelligence and/or Machine Learning capabilities, stay abreast of technological convergences, or for any number of other reasons.
Tech acquisitions come with unique challenges, however, as most target companies don’t fit the typical brick and mortar M&A mold. For large organizations accustomed to thorough diligence processes, a tech startup's youth often means that limited financial and commercial documentation are available to be reviewed.
Yet, conglomerates can be successful making acquisitions in the tech space, so long as they ask the right questions and understand how to adjust their due diligence efforts accordingly.
In our experience, the following three areas pose the greatest challenges – here’s how to start thinking about them.
Going into a tech acquisition- it’s crucial for buyers to understand where the value of the target lies. For example, does the value lie in the technology itself or the know-how of certain individuals? If the former, does the target properly own the technology? Has it been protected adequately? Is it infringing on anyone else’s intellectual property rights? Can the rights to the technology be easily transferred?
If the value lies in the know-how, the diligence process may be even more challenging, because keeping such know-how confidential is critical to maintaining its value. In a recent acquisition, the seller could hardly open their books for fear of revealing this information. Working around such restraints meant devising a process where on the one hand, the know-how is being protected, and on the other, the buyer can adequately run the due diligence needed.
As the acquisition process develops, it’s important to find out who the key employees are and how they can be prevented from opening the same type of business across the street if integration doesn’t work out. Since many employees may not have existing employment contracts, asking the right questions to the right people early on is critical.
Further, an entrepreneurial, Silicon Valley-type might not always be the best cultural fit in a large organization, but they’re often the most critical element in a deal. Retaining key employees might come down to economic incentives (e.g. retention bonuses), but also may involve creating a slimmed-down policy atmosphere where tech talent remains free to be innovative and creative.
In instances where this may not be possible, it’s important to ask: What else can we offer? For example, in Japan, acquisitions are seen as long-term partnerships and conglomerates can provide easier access to fast growing South Asian markets.
At the outset of the acquisition process, it’s crucial that buyers understand the nature of existing (or non-existent) contractual arrangements, be they commercial, employment, intellectual property licensing contracts, or otherwise, so the buyer can plan accordingly.