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A big company just bought your competitor. Now what?

by on April 5, 2016

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Often a big company will come into your market and acquire one of your competitors for what seems like a lot of money.  One of the first thoughts that goes through your mind as the CEO is, “Why not my company?”

It shouldn’t really matter if an acquirer buys your competitor because you’re focused on building your company and developing your product, except it means that you weren’t acquired. Not only weren’t you acquired but your competition just got a big financial backer and a lot more resources.

I’m not sure which is worse actually – To be in the conversation but know that Big Co. picked someone else or if you weren’t even being considered by Big Co.

Hopefully you were at least in the conversation, meaning while Big Co. was looking at the various companies in a particular space of interest they were at least talking to you, too.

But maybe they weren’t.

This has happened to me in both methods.  One time we were in talks with Dell when we noticed things weren’t going as they should be.  Dell is a big company and there are a lot of people that get involved in M&A decisions, but people were not delivering on commitments as they should.  There seemed to be a lot of questions about what we thought were minor or small issues.  And then there was radio silence.  We soon found out that Dell acquired SonicWALL for $1.2 billion. Not a direct competitor in our mind but they did provide a security solution.  And Dell wasn’t going to buy two companies in that space at that time. To Dell’s credit, they let us know they weren’t buying us before the SonicWALL deal was announced.

The purchase price for SonicWALL was substantially more than the amount being discussed in our negotiations.  It shows that it isn’t always about price.  Dell found more value in SonicWALL than it did in my company.  But it sure didn’t feel good to know that Dell wasn’t valuing my company for what we were providing.  Instead they were seeing the deficiencies that our solution didn’t provide that they were looking for.

I’ve also been in the situation where a competitor was acquired by Big Co and didn’t even talk to my company.  Ouch.  Here we thought we were this “hot” company with great technology and we weren’t even invited to the dance.  Where did we go wrong?

I’ll tell you where we went wrong.  We didn’t have a very good understanding of our strategic capabilities relative to our business risks.  In other words we didn’t see ourselves the way a potential acquired saw us.

What I mean is that the value of a company is determined by both internal factors, which are subject to the control of management, and external factors, which are out of the control of a company.  Key factors that influence valuation are risks inherent in the ongoing operation of a business and strategic capabilities possessed by an organization that will drive future growth and profitability.

In the tech business the value of a company is generally determined by the following simple equation:

V = R x M

V = Value, R = Revenue, and M = Multiple

We had a perspective of ourselves that we thought justified a multiple greater than the industry average, and therefore we had a value that we thought was higher than the industry norm.

But someone from the outside, a potential buyer, had a different opinion, whether we were in discussions or weren’t even being considered.  They saw us at a much lower valuation because our strategic capabilities weren’t as strong as we thought and/or our business risk was greater than we thought.

We needed to have someone provide an outside perspective on our value and then we could have worked on the right issues to drive our valuation – accentuating our strategic capabilities and minimizing our business risk.

p.s.

If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn the 5 step process on How to Quickly Increase Your Valuation: a Proven 5 Step Process.  http://www.therevenuegroup.net/free-offer.html

 

 

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From → M&A, Strategy, Valuation

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