At some point in their existence, many startups have to confront certain existential questions – about themselves and their future. Some of these typical questions: “Are we on the right track? Are we likely to reach where we wanted to? We need to grow fast but how? Should we acquire and grow? Should we be acquired”?
Three real life situations from my experience:
1. There was a term sheet on the table from the large well known public company to acquire the young VC funded startup. The price seemed right, the company was respectful of the startup, the products were complementary and the cultures seemed to match. The deal didn’t go through because the CEO of the startup couldn’t be accommodated in any worthwhile role in the large well known public company though all the other startup employees would’ve been absorbed. So the startup CEO rejected the offer.
2. The CEO of a startup that had raised venture capital financing was under severe pressure. He had aggressively promoted his company’s offerings in a bid to acquire market share and had tasted success but at a terrible cost to his cash position. He had a large number of customers but was barely making money on each sale. It seemed that the more he sold, the more he would lose! His customers had got used to a very low pricing and would leave if prices were raised. The startup was addressing a large, new, fast growing market but a very competitive one (there were at least 2 other funded startups). So he called the CEO of the market leader (another of the funded startups) to discuss a “strategic partnership.” Translation: he wanted to be acquired. The discussions did not make much progress as there was no agreement on the pricing and more importantly on the roles and responsibilities of acquired company CEO in the new merged entity.
3. The CEO wanted to grow fast. His company was number two in a fast growing market and had carved a space for itself. There wasn’t a big gap between his company and the market leader. One day, he received word that one of his overseas partners was considering selling out. The overseas partner was slightly smaller in revenues, had a set of well known customers, had recently turned profitable and had services that were complementary to the startup’s own. The CEO was excited as he considered the opportunity that would allow his startup to suddenly acquire an international footprint, gain an entirely new set of customers, acquire financial size profitably and get an experienced entrepreneurial leadership team in place for any international expansion plans.
The best part, it appeared, was the team – they were known to this CEO for over 5 years and there was a sense of mutual comfort. Accordingly, the due diligence began in earnest. Financial statements were analysed, sales data was scrutinized, contracts were reviewed, business processes were understood, customer satisfaction audits were performed. Everything checked out and it seemed only a matter of time before the deal would get inked. However, the deal didn’t happen. These leaders had far more experience and understood their markets very well. They also became acutely aware of the constraints – having to follow new processes, had to get budgets approved, carry new business cards with new job titles and had to follow new reporting mechanisms. The leaders of the overseas company were hesitant to report to the CEO of the acquiring company since they considered him to be junior.
These 3 examples only illustrate the fact that most M&A deals collapse due to so-called “people issues”. While spreadsheets can be manipulated to show “synergies” and balance sheets massaged to show “accretion”, it is very hard to ignore the fact that mergers and acquisitions involve real people with emotions, egos and aspirations. Deals don’t get done by and between nameless emotion-less ego-less legal entities called companies (however much we may want to believe otherwise) but by and between people. The adage “If the chemistry isn’t right, the arithmetic won’t work!” is important to keep in mind as well.
The most crucial step therefore is to therefore understand the motivations, aspirations, working styles, roles and responsibilities of people and accordingly tailor the deal rather than force-fit people into contrived positions and roles.
What do you think?
[Sanjay Anandaram brings over two decades of experience as an executive, entrepreneur advisor and investor. He is a passionate advocate of entrepreneurship in India. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school. The article first appeared in FE and is reproduced with author’s permission.]