We all want to feel special, to believe we make a difference, that we contribute to society whether it be through job creation, volunteering our time or some other means. M&A is no different. Target company CEOs and management teams want to feel loved. This is especially true of founder CEOs. Should a founder CEO wish to sell his/her business, they will want to be fairly compensated, but will also care deeply about what life will look like post-deal. For example:
“Who will my team report to?”
“What do you (the acquirer) know about my business? My industry?”
“Will you invest in my industry/ do you have a history of making acquisitions in the industry?”
“What will Sales cross-training look like?”
“What if I become disabled and am unable to fulfill my duties?”
“How will myself and key employees be compensated? Upfront vs. performance-based compensation split?”
“What are performance-based metrics based upon – Revs vs. EBITDA vs. Bookings..?”
You are a Technology company CEO and/or Board member and the company generates significant free cash flow. You are thinking through your options as to how best to deploy discretionary capital:
1.) M&A: Our advice is go for it. M&A is rarely easy for a variety of reasons but a disciplined approach can result in a positive ROIC rather quickly. Further, M&A can augment or almost entirely replace (speaking from experience) organic product development. There aren’t any shortcuts to effective M&A execution. Assuming two parties agree on strategic fit and are willing to engage, rigorous due diligence is the only way to ensure product/ technology stack fit, cultural fit, financial health of the target etc.
2.) Pay a Dividend: The optimal way to return capital to shareholders.
3.) Invest in New Product Development: Whether it is an ambitious technology re-write, product refreshes or small dollar experimentation – it is difficult to argue with a technology company that wishes to invest in its product portfolio.
4.) Stock Buybacks: Skip them. Buybacks/ share repurchases have been in vogue with I-Banks and companies for the past decade. Bankers like buybacks because they generate fees. Shareholders like them because they prop up the stock and provide liquidity. Companies like them because they prop up the stock, their large shareholders often recommend them and they reduce options dilution. We don’t like share repurchases because they represent an undisciplined approach to providing liquidity to shareholders.Further, once shareholders and companies get hooked on share repurchases, it is difficult to find discipline. John Malone says it succinctly with his cookie consumption analogy: