02 May 2009

Acquisition As An Exit Alternative

As a follow-up to my recent blog posting about the dearth of IPOs (and the effect it's having on the early stage venture market), here is an interesting article from the WSJ about the state of health in the M and A space:

http://blogs.wsj.com/venturecapital/2009/04/29/acquirers-back-in-the-game-but-vcs-advised-to-tread-carefully/

I particularly like this quote from Dan Williams, an I-banker at Montgomery & Co.:

“We’re advising our clients to push the scarcity value discussions, and synergy value discussion, before you ever talk price,” he said. “Otherwise you’re going to get into a situation where the buyer thinks, ‘This is a must-sell situation,’ and then they’ve got all the leverage.”

Scarcity and synergy....

In my view, the "scarcity" discussion may be hard for many startups-- particularly in the Internet space-- to argue effectively. It's never been easier or cheaper to start a company, and as a result, any good idea is immediately copied 10-fold (often with just minor variations in user interface, features, or target audience).

The "synergy" discussion-- although it's something of a empty buzzword-- may be an easier sell, particularly if the startup has something truly innovative or is gaining some real traction. A trend I've noticed recently is that many old-line firms are sitting up and taking notice of new media and social media trends as a new marketing avenue. How can they not when Oprah is pushing Twitter on her show?

But they are often rather clueless about how to wade into the social media stream without getting swept up in a backlash (think Domino's and the viral video of an employee doing, ummm, "unpleasant" things with a customer's pizza).

Here is where startups can, in fact, bring synergy. They can bring the web media experience, the look and feel, and ideally, the user base to the acquiring firm. Many startups also have a fresh design aesthetic that can be invigorating. In essence, they can make the old firms appear young again-- and who wouldn't pay a valuation premium for that?

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