January 26, 2022

M&A, Before and After: What Founders Need to Know

00:25:47

Summary

Podcast Episode Summary

The A16Z podcast episode discusses the mindsets and frameworks founders should know about when navigating mergers and acquisitions (M&A) processes. The episode features two A16Z experts, Blake Kim and Martin Casado, who share their insights on the M&A process, including pricing dynamics, decision-making factors, and integration challenges.

Main Topic

The main topic of the episode is the M&A process, specifically how founders can navigate the process, including how to think about pricing dynamics, factors that go into the decision-making process, and what to expect from the integration once the deal is done.

Key Points

There are three primary reasons why companies engage in M&A: to achieve product-market fit, to scale beyond $30-50 million in revenue, or to get acquired by a strategic buyer.
Having a pre-existing commercial relationship with a strategic buyer is crucial in getting acquired rather than sold.
Valuation implications and dynamics are influenced by the buyer's internal champions, who must take a pricing risk to maximize the sale price.
Founders should use frameworks to make decisions, considering factors such as risk tolerance, practicality, and expected outcomes.
The decision to sell or not is complex and depends on various factors, including founder psychology, motivations, and risk tolerance.

Founders should prioritize building a pre-existing commercial relationship with strategic buyers to increase the chances of getting acquired rather than sold.
The decision to sell or not is complex and depends on various factors, including founder psychology, motivations, and risk tolerance.
Integration of cultures after an M&A can be challenging, and founders should prioritize communication, culture, and operating processes to manage the people aspect of the merger.
Keeping the sales team intact is crucial for post-acquisition success, especially in B2B sales.
Founders should be aware of the potential challenges and complexities involved in the M&A process and prioritize building a strong team and culture to navigate these challenges.

Show Notes

Welcome to the a16z podcast. Today we’re talking about the mindsets and frameworks founders should know about when navigating the mergers and acquisitions or M&A process, both before and after – including how to think about the pricing dynamics, factors that go into the decision-making process, and what to expect from the integration once the deal is done.

A16z editorial partner Zoran Basich recently talked to two a16z experts here to give us their big-picture view of the most important things to know – for founders seeking to acquire companies and how they might think about it, or those considering selling a company, or just those deciding to merge with an acquirer.

Blake Kim is a partner on our Enterprise Network team and a former investment banker who works with companies on strategic partnerships; he also recently co-wrote a post on Future outlining all the different exit options and considerations for companies. And general partner Martin Casado discusses common M&A issues and shares his experiences both as observer and participant – including the challenges of integration, which he saw from the inside with Nicira, which he cofounded and was acquired by VMware for $1.26 billion in 2012, and where he remained for years to lead its networking and security business unit.

As a reminder, none of the following should be taken as investment advice. Please see a16z.com/disclosures for more important information.

They start the discussion by outlining the frameworks for understanding M&A dynamics, including the “kingmaking dynamic” and the difference between “selling your company” and “getting acquired.”

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Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures.

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Transcript

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Zoran Basich: Welcome to the A16Z podcast. I'm Zoran Basich. Today, we're discussing the mindsets and frameworks founders should consider when navigating the mergers and acquisitions process. Joining me are Blake Kim, a partner on our Enterprise Network team and former investment banker, and Martin Casado, a general partner who shares his M&A experiences, including the acquisition of Nicira by VMware.

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Zoran Basich: We start with the frameworks for understanding M&A dynamics. Blake, can you outline the primary reasons for M&A?

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Blake Kim: There are three main reasons. First, a company may realize it can't achieve product-market fit and can't secure further funding, leaving no choice but to sell. Second, a company with limited growth potential may sell to avoid the challenges of becoming publicly traded. Third, a company might be acquired when a buyer offers a compelling premium, driven by strategic value rather than distress.

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Zoran Basich: What distinguishes being acquired from selling?

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Blake Kim: Being acquired often results in better terms and higher prices. Selling typically happens when issues exist, sometimes leading to a distressed sale. To be acquired, building a pre-existing commercial relationship with the buyer is crucial for a seamless integration and higher valuation.

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Zoran Basich: How does this commercial relationship affect valuation?

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Blake Kim: A pre-existing relationship helps the buyer understand the target deeply, reducing risks and increasing the price they're willing to pay. Founders should focus on how this relationship can boost revenue, potentially leading to strategic discussions later.

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Zoran Basich: How do founders decide whether to be acquired?

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Blake Kim: Founders must weigh maximizing shareholder value against strategic considerations. This involves complex calculus, considering factors like market position and risk tolerance.

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Zoran Basich: Martin, can you share your experience with Nicira?

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Martin Casado: Nicira received acquisition offers annually. Despite our growth, VMware's strategic position as a kingmaker influenced our decision. They could acquire another company, potentially undermining our market leadership, making selling strategic.

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Zoran Basich: What other factors influence M&A decisions?

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Martin Casado: Founder psychology plays a role. Financial motivations, age, and risk tolerance vary. Younger founders might take more risks, while experienced ones might prefer a stable exit.

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Zoran Basich: What financial frameworks guide these decisions?

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Martin Casado: Expected outcomes versus risk-adjusted returns. While the expected value of staying independent might be higher, shareholders often prefer lower-risk, immediate returns. This balance is complex.

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Zoran Basich: How do potential buyers' types affect deals?

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Blake Kim: Large strategics pay the most, driven by synergies. PE firms pay less and are disciplined. Private companies may acquire for specific needs. Strategic buyers are best for startups due to shared vision.

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Zoran Basich: Post-M&A, what challenges arise?

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Martin Casado: Integration is toughest, especially cultural. Nicira's flat, consensus-driven culture clashed with VMware's hierarchical structure. Managing these differences is crucial.

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Zoran Basich: What strategies aid integration?

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Martin Casado: Retaining key teams, like sales, is vital. At Nicira, keeping our sales team ensured alignment with our product's market. Founders should focus on cultural and operational integration.

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Zoran Basich: What makes integration fail?

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Martin Casado: Majority of acquisitions fail due to poor team integration. Trust issues and inequities arise. Founders must lead through these challenges.

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Zoran Basich: Thank you, Blake and Martin, for your insights.

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Blake Kim: Thank you.

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Martin Casado: Thank you.