Microsoft paid $26 billion to acquire LinkedIn[i], yet the UK automotive brand Land Rover (Range Rover) was acquired by Tata Motors for less than 8% of that amount at only $2 billion—and they got Jaguar as part of the deal, also.[ii] How is it possible that a software company with few capital assets and limited operating history can fetch so much more than a manufacturing company with a storied brand, state-of-the-art factories[iii], and global inventories of sought-after products?
This post answers that question by outlining the difference between strategic value and financial value, and illustrates how you can position your company for maximum valuation and desirability to be acquired.
How Companies Get Acquired:
When companies are acquired, the purchase price is ultimately a negotiated number that is determined by a blend of asset calculations, market and growth considerations, scarcity or prevalence of competitive buying options, et cetera. Usually, the acquirer determines your base enterprise value first through the lens of a financial model (e.g. multiple of adjusted EBITDA[iv]) and then layers additional value on top, according to other considerations.
So the key to getting a high valuation (acquisition price) for your company is to make the buyer really want you, and only you, so that they layer on additional value beyond your financials. That’s called strategic value, and it implies that your company can help the acquiring company to expand into a new category, or jump-start development of a new product, or prevent their competitors from having access to your technology, or otherwise help the acquirer grow faster and larger than their competitors.
Financial value (sometimes called intrinsic value), as outlined above, is calculated as some multiple of your gross revenues or adjusted EBITDA. It bears repeating that it is usually a mistake to sell your company based purely on its financial value, because you will probably be leaving money on the table—you’re not getting any premium on the deal. Private Equity buyers are often “financial buyers” in that their interest is in the potential cash flow generated by your business and the future growth and exit opportunities from the business. The multiple they pay is calculated in terms of IRR[v] and by comparing to other companies in your sector. Unless you’re able to justify a higher multiple than your competitors or substantiate your strategic value, you’re not maximizing your company valuation in the deal.
So how do you attract strategic buyers and premium M&A value for your company? To recognize strategic value you need to put yourself into the buyer’s shoes and understand how you can create value for a particular acquirer. For instance:
- Can the acquiring company plug your products into their distribution channels and make a ton of money quickly?
- Would the acquisition diversify the buyer’s revenue concentration or market sector concentration?
- Could the acquirer use your customer beachhead to parlay that into sales in an entirely new adjacent market or customer profile? (e.g. DTC v. SMB v. Enterprise)
- Can your core technology leapfrog the acquirer past its competitors?
- Is your technology a competitive asset that the acquirer might want to buy for themselves in order to block competitors from having access to it? (this is often the reason you’ll see bidding wars to acquire a company; it’s a fantastic place to be if your company is the acquisition target)
Equally important is how to gain the attention of a strategic buyer. You need to stand out from among all the other companies. To do that, you might ask yourself:
- Does my company ‘own’ the #1 position in a niche market sector that the buyer wants to enter?
- Does my brand have a loyal customer following or community trust that clearly establishes us as sector leaders?
- Is my CEO recognized as a thought-leader in the industry, or does my company publish some data or metrics about the industry that competitors and analysts follow?
- Does my company have 3rd-party validation in the form of press articles, or industry-recognized data resources, or analyst coverage that makes us stand apart from our competition?
A Few Examples to Illustrate:
It’s easier to understand strategic value when you see it in action. So here are a few examples to illustrate:
1. Google’s Acquisition of Looker
Google acquired analytics startup Looker for $2.6 billion (~20x revenues) to solve a problem. The problem was that Google Cloud was struggling as a distant 3rd contender in the cloud infrastructure industry, behind Amazon AWS and Microsoft Azure. They bought Looker to get “…an end-to-end analytics platform to connect, collect, analyze and visualize data across Google Cloud, Azure, AWS, on-premise databases and ISV applications,” per the media briefing when the deal was announced.[vi]
Google paid a cool $1 billion premium over Looker’s $1.6 billion valuation from just 6 months earlier, when Looker had raised a $103 million round. Looker had developed a platform technology that clearly represented strategic value for Google’s cloud infrastructure business, and Google was willing to pay handsomely.
2. PayPal’s Acquisition of Honey Science
Just last week, PayPay acquired a consumer shopping app called Honey Science for $4 billion. The Honey browser extension and mobile app tracks prices of 30,000 online retailers and sends price alerts to 17 million monthly mobile users. Honey partners closely with retailers such as Macy’s, Etsy, Walmart, Expedia, Sephora, and others.
PayPal is fundamentally a payments processor, and has acquired many companies before—mobile payments technologies like Venmo, international payments platforms like Xoom, fraud prevention technologies like Simility. But the $4 billion Honey deal is by far the largest acquisition that PayPal has ever completed. Why? Because while prior acquisitions are pieces of technology to plug into PayPal’s existing business, the Honey deal is being described as PayPal’s first move up the e-commerce value chain “…by moving up to the front end of the shopping experience instead of remaining at the back end at checkout,” according to Bank America analyst Jason Kupferberg.[vii]
The Honey acquisition is strategic. It moves PayPal toward becoming a total commerce platform. And PayPal is willing to pay a premium price to acquire a company that allows them to do that.
3. Blackberry’s Acquisition of Cylance
Blackberry’s acquisition of cyber-security company Cylance for $1.4 billion is by far its largest deal to-date. Blackberry has been missing from popular consciousness for more than a decade. Once known as maker of ubiquitous email-capable mobile phone devices, the company ultimately licensed its hardware business and morphed back to its roots as a developer of secure, enterprise-grade software and services.
Critics of the deal noted that Cylance’s $130 million in revenues would have minimal impact on Blackberry’s financial performance, however Cylance’s revenues were growing more than 50%. Moreover, Cylance is a market leader in the security space and has 3,500 enterprise customers including many of the top Fortune 500 companies.
Cybersecurity is hot sector and Blackberry is doubling-down on it as a natural extension to its encryption technology. Cylance’s technology uses machine learning and artificial intelligence to prevent suspicious code hacking attempts and secure the mobile devices it manages.
The combination of Blackberry and Cylance makes the company a one-stop-shop for enterprise mobile device security and management. Hence, Cylance was a strategic acquisition for which Blackberry was willing to pay a premium.
There are many ways to optimize your strategic value for M&A, and it’s what we at XROCKET help companies to do. Strategic value comes down cultivating your company’s most strategic asset, and positioning yourself among competitors as the leading company in your sector such that a potential buyer wants you, and only you, and is willing to pay a premium price to get you.
If you know a company that is considering M&A in a 1-2 year time frame, now is a perfect time to contact us at XROCKET: m.addison@xrocket.io
[ii] https://www.tatamotors.com/press/tata-motors-completes-acquisition-of-jaguar-land-rover/
[iii] https://www.youtube.com/watch?v=9xYD7cG-H7g
[iv] https://www.investopedia.com/terms/a/adjusted-ebitda.asp
[v] https://www.investopedia.com/terms/i/irr.asp
[vi] https://techcrunch.com/2019/06/06/google-to-acquire-analytics-startup-looker-for-2-6-billion/
[vii] https://www.investors.com/news/technology/paypal-stock-pypl-acquires-honey-consumer-shopping-app/