Lessons Learned after $5B of M&A | Hacker News Reader

Lessons Learned after $5B of M&A

tomtunguz.com

217 pointsttunguz72 comments

These are the lessons from the selling side. From the buying side there's a different set of lessons, like: they sold us junk that doesn't really work, their people are leaving to another start-up the founder created, nightmarish regulatory violations that only pop up after the merger, having to re-build their entire tech stack/accounts from scratch because it was all built by hand and held together with masking tape, contracts not discovered until after the merger, vetting all software licenses and use cases, the product not being able to integrate with your product like they claimed, 10 years of tech debt. Then there's how much time and money you lose and risk you gain from not doing enough due diligence or not having an efficient onboarding/integration process. I've been at large companies that were M&A masters, and companies that have done dozens of M&As and still can't get a single one right.

I have wondered this too -- honestly the big co's best strategy is either: truly hire you with an upfront bonus or wait for you to die out and pick up the pieces. Those that go for flashy deals to fly with the stock price seem to suffer from what you note above.

Heck you could even say the Amazon Whole Foods Acquisition was a loser -- they haven't leveraged the store network like Walmart has.

>Heck you could even say the Amazon Whole Foods Acquisition was a loser -- they haven't leveraged the store network like Walmart has.

As someone who was a regular at Whole Foods even before the Amazon acquisition, from my viewpoint, it has been a win-win.

1. The online shopping experience has been amazing from the Amazon site/app. Target comes close. 1.a. The free delivery for Prime members was an awesome perk while it lasted and definitely made me buy from WF more than the alternatives I have.

2. I get 5% from the Prime card, I actually am incentivized to shop more at WF.

3. Amazon wise I can safely pick up my packages from the nearest store.

We've been working on tools for post-merger integration, and there don't seem to really be any other tools in the space. It's a huge problem.

Personally I think it's more of a standards/process problem. We need an ITIL for M&A. Then you can create tooling for it, or just throw something together ad-hoc, but either way you'd be following a uniform process. Good tooling without good process won't lead to good results.

Due Diligence is an art form. Not an activity where move fast and break things works.

> the product not being able to integrate with your product like they claimed

This one jumped out at me.

I've definitely seen integration struggles post-acquisition, but I typically find that the parent company (buyer) needs to be accountable for that integration. But you seem to be saying it is the seller's responsibility to understand the buyer's product and evaluate the integration during due diligence? Did I read that correctly? If so, I'd like to understand that perspective better - would you be willing to elaborate?

> But you seem to be saying it is the seller's responsibility to understand the buyer's product and evaluate the integration during due diligence?

I'm not OP, but I don't think that's what they meant:

>> the product not being able to integrate with your product like they claimed

It's lack of due diligence by the buyer after being deceived (intentionally or not). I imagine the seller saying "We support gRPC too, so we can interop easily" and then discovering that's not quite the case afterwards.

Yep. It's 100% the buyers' responsibility to vet what they're buying, but the seller can obscure a lot until after the sale.

It's like buying a used car. You need a mechanic to really get in there and find all the rotten bits, based on where you intend to drive it (and how long)

We sold our 8-year-old startup last year, and boy do a lot of these bullet points ring true. We were very lucky that one of the founders was skilled at the M&A game, or we would have underpriced it dramatically.

If you’re thinking about selling, I’d recommend hiring an advisor firm. They charge a 2-8% fee, but they are worth it. You get better valuations and help with the tricky clauses.

The one about losing leverage after term sheet, it depends. Our acquirer was a public company, so they had to announce the signing to the market. It would look really bad if the acquisition didn’t go through (stock jumped when TS was announced), so I’d say we had even more leverage then.

Edit: typo

Any advice on finding the right advisor firm for a sale in the high $xx million range? We're a team of builders and have no experience in M&A, and little experience in finance/negotiation.

I’m worried that a broker will be incentivized to close a deal at an undervalued price, similar to brokers in real estate.

Oftentimes a banker would include an incentive fee for higher valuation - 2% of value up to $50M then 3% on anything above $50M. You can negotiate all these things up front.

In all honesty, my concrete advice would be reaching out to other local founders privately and asked what worked for them and what didn't. Note there usually is a lot to these stories that aren't told in public for many reasons.

On top, one thing I regret is not having joined a network of founders and entrepreneurs earlier. These days, I would just ask them and get 2-3 spot-on recommendations with warm intros in a day. We hackers and builders usually scoff at these kind of "elite" networks until we realize building and selling a company is fundamentally a people business, where connections and trust are paramount. Reach out to me on LinkedIn for an intro to the organization I'm in (it's global).

As for the original advice: +100 from my side. Especially if the whole founder round is not experienced, you really want to have a cold blooded veteran on your side. Someone who commands respect by founders, is hired by you guys and is incentivized by getting home a part of the deal. Not only do these brokers have the know-how, they usually have a vast network of interested parties to bring to the table at any time to get a bidding war started and are experienced in navigating the delicate timing of the funnel that is crucial for a success. The differences in outcome I've personally witnessed with and without brokers are night and day, even though I have my own cultural issues with them.

> In all honesty, my concrete advice would be reaching out to other local founders privately and asked what worked for them and what didn't. Note there usually is a lot to these stories that aren't told in public for many reasons.

This is the best advice. You won't be able to 'interview them' and make a good judgment, the people that have already gone through a process with them know better what they are like. And even then you have to be aware that plenty of these places have 'A' and 'B' teams and that you need to make sure you are comparing apples-to-apples.

Interview several firms that have done deals in your space/vertical, and where this will be a meaningful transaction to the firm/md - and ask them for valuation guidance (e.g. what they think they think they can sell your company for) you’ll generally find they’ll be in a similar range (e.g. 4-5x ARR) that should set expectations for the sale process.

Deal structure can be worth ~20%+ of purchase price so don’t be myopic on focusing on price only. Trying to get the last dollar usually leads to broken deals and unhappy people on both sides, but you want to make sure that you’re getting a good market read on value for your business.

Make sure you trust the team/have chemistry, you’ll go through quite a bit together. Also make sure you have M&A counsel - don’t let your commercial counsel handle this (you wouldn’t let your internist perform open heart surgery on you…)

> Deal structure can be worth ~20%+ of purchase price so don’t be myopic on focusing on price only.

This. Asset sale vs. merger is a great example. If you do an asset sale you'll need to wind down the company, pay corporate taxes, pay out everyone, etc. I've done it once and it was just about the most stressful thing I've ever been through. It's also a huge millstone if you are simultaneously working at the acquirer.

Interview them. That is what we did and it worked great. Where are you located? I used ours twice and both times was happy.

You can incentivise them to push for higher prices with the terms you offer them. The ones I worked with were highly motivated and skilled at pushing higher.

Pick any of the big four; PwC, EY, Deloitte, KPMG.

Typically they'll do a valuation and put a bonus threshold. x% under, x+n% if over.

Since these firms charge a % of the deal they have an incentive to get higher valuations. It also looks good on their resume. But you can just look at their portfolio and see the exists they worked on, the valuation, who the acquirer was, etc. You can try and reach out to some founders to check if they liked working with the advisor too.

We sold our company to VMware in 2014 with help from GrowthPoint Partners. Some learnings about the deal.

* Find multiple firms and interview them carefully. They have to sync well with your board because you'll need a high level of trust to get the deal done. Check references.

* Good advisors have done a lot of deals and have a lot of connections in the vertical you are in. They should be able to list possible acquirers off the cuff and why you are a fit. If they can't do that, move on.

* You want somebody who can run the deal process - which is really time intensive - while you run the business. It's really hard to do both.

* Good advisors will guide you through every step of the process from developing the pitch deck to acquirers to due diligence at the end. You'll quickly realize how little you know about any of these things if it's your first time through. If they aren't hands-on, again, move on.

The fees may seem high if you've never done a deal. They are justified by the potentially huge swing in price if you get somebody good. You can be looking at a 2x difference in price if you get multiple bidders. Comp the advisors on outcome and give them unlimited upside for a great result. It's just like comp'ing sales if you've done that.

Just my $0.02.

I echo this strongly:

> * Good advisors have done a lot of deals and have a lot of connections in the vertical you are in. They should be able to list possible acquirers off the cuff and why you are a fit. If they can't do that, move on.

… as well as someone else's comment that the terms in the engagement letter are negotiable. If a banker claims that their interests are aligned with yours, then turns around and delivers an engagement letter with a huge fixed fee and little or no variable fee based on outcome, either negotiate or move on.

We used Cascadia Capital when Papertrail was acquired and I was very satisfied (https://www.cascadiacapital.com/case-study/papertrail/, https://www.cascadiacapital.com/story/cascadia-capital-advis...). Since we were entirely bootstrapped, their fee came directly out of our proceeds, and it was completely worthwhile. (If any founders read this, have a serious opportunity at a $20+ million offer, and want a sounding board, feel free to contact me.)

Same offer as Troy. Contact me for more info. Our deal size was similar and we were also essentially bootstrapped. My email is in About.

p.s., Yay Papertrail. We know you guys from ClickHouse. Great to get the backstory on the outcome. ;)

How long did the process take for you? From getting the word out until sale? Once you had an offer, how long did due diligence take?

I've sold 4 startups. Median time from starting the process to close was 6 months, with the quickest transaction taking 2.5 months and the slowest almost 9 months.

Diligence ranged from 3 weeks to 7 weeks.

Fastest transactions were private company acquisitions. Slowest were public company deals.

Curious: were there any takeaways for the question "what to build for what outcome"?

As in, was there an association with time building + time in market = greater sales price? Did Higher Free Cash Flow or Higher Growth lead to a better ratio (cash v stock) for offers?

Very curious -- four successes is quite the batting average

Ironically (or perhaps interestingly), none were built for the actual outcome. The first, third, and fourth were all built with the dream of IPO in mind. The second was built as a lifestyle business.

Yeah... the batting average is why I've never done a fifth. I wanted to pull a Sandy Koufax and go out on top.

Wow that seems relatively quick. If you're comfortable, can you share the size of these sales and their geography?

All were less than $250M, all were US companies being sold to US-headquartered companies.

From the time we decided it was time to sell (for real, not just theoretically) until the money was in the bank, almost 18 months. It took us 2 months to find an advisor, then another 3-4 months building the deck and investor material (cashflows, projections, etc). We put up a bid, so we had some 8 companies interested at first and we narrowed that down to 3. That process was LONG, but that is what gets better valuation - competition. After we signed the term sheet it was another 6 months due to regulation and legal quirks, due to the acquirer being a public company. Those were the longest 6 months of our lives :)

> If you’re thinking about selling, I’d recommend hiring an advisor firm. They charge a 2-8% fee, but they are worth it. You get better valuations and help with the tricky clauses.

I agree but: you also have to do due diligence on your advisor firm, they are definitely not all created equal, I've seen some of these blow up perfectly good deals and like any other broker their incentives may seem aligned but on closer inspection they really are not. Get them to run the process, but keep them out of the decision making loop other than as a conduit to create breathing room. Never have a quorum of shareholders at the table during negotiations or you're going to get skinned. Get offers, go back to the shareholders / founders and discuss, then counteroffer.

jacques and I both work in M&A so we see a lot of these deals. trust what he says above.

to add a few things from the questions in the threads here:

- Lawyers IMO are much more important for deal dynamics than investment bankers. investment bankers will find you the buyer, help price the deal, and manage the process, but lawyers are the ones who make sure your terms are right. Kirkland Ellis, DLA, Troutman, Weil, Morgan Lewis etc.

- re: Investment bankers ("advisor firm"). The best firm for SaaS I've seen is William Blair - the companies they represent are consistently top tier and well prepared when we review them on the buy side. If you take this list: https://firsthand.co/best-companies-to-work-for/banking/most... my general advice is to stay away from the retail bank names (BoA, Citi, DB, etc.) and the big four (EY, PwC, etc.). But pretty much everyone else is solid.

Happy to answer any other questions. I've sat through 300+ transactions (mostly on the tech advisory side) and went through my own sale recently.

I've been lucky enough to have sold two companies (edit: in the very low $XXX M range to provide context on the rest of my comment), and 1 is the most important point by far in this list.

The other thing that I almost think should be point 0 is that medium sized acquisitions (high $XX M - low $XXX M) are incredibly hard to "incept". If you're looking for a low $XX M exit, that can be justified with good tech + a good team. If you're looking for larger exits, that's all about revenue, and company traction.

For the high $XX M to low $XXX M acquisitions, you can't just start talking to companies 6 months to a year before you run out of cash to make it happen. Typical tech companies do product planning cycles 1 to 2 years in advance, and a key part of that planning cycle is whether they're going to build or buy parts of the solution. The result here is that unless your product/company is part of the acquirer's plan (e.g., either to buy you or to build equivalent that was too hard), it's really hard to get the corporate sponsor and the budget and the timeline etc to work. Hence, it's damn hard to "incept" a deal.

This is important for founders to understand IMO because so many of the recent Series A and Series B fund-raises have taken low $M ARR companies and given them valuations >$100M. That means these companies have no option but to go for a revenue and traction outcome after >$30-50M ARR. Tech acquirers aren't going to pay a premium of your Series B valuation if you don't have consistent off the charts growth. IMO, there's going to be disappointed employees mainly in a bunch of companies in the next 2-3 years.

> If you're looking for larger exits, that's all about revenue, and company traction.

That's highly dependent on the space. Companies in emerging domains can be bought pre-revenue at valuations that by traditional metrics do not make sense simply to gain some time.

> This is important for founders to understand IMO because so many of the recent Series A and Series B fund-raises have taken low $M ARR companies and given them valuations >$100M.

This is also puzzling to me. Many founders are just not thinking clearly about exits. Acquirers want revenue and accretive value at a reasonable valuation.

I read a really great book recently - "Failing to win" - about a hot startup that had all the momentum behind it, but ultimately failed.

It covers many of the points in this article and more - and the pacing is a really great.

It is one of the most insightful page-turners I've read in recent times.

[0] https://www.amazon.com/Failing-Win-Hard-earned-purpose-drive...

#7/8 are the most important in my experience. Easy to lose all of your leverage if you don't know what you're doing when you're negotiating the LOI.

In addition to the LOI items, we got conceptual agreement on the phone from all decision makers about a huge list of other items that we couldn't fit in the LOI and sent an email recap.

To this day I call the recap email the "golden email" as it was definitely the most profitable email I've ever sent.

I'm curious about this. Why the recap email was so important? What did it cover that the LOI didn't?

Likely things like:

1. Founder gets a special washroom with a golden toilet seat.

2. Unlimited lattes at Philz, but only on Tuesdays.

Not the OP. Though I have been part of a sale process as a founder (with a reasonably complex deal structure) and have had friends sell companies in the past and different friends who are in ongoing acquisitions. Let me see if I can provide some details without violating any NDAs!

To give a bit more color, the LOI usually is just the basic financial terms of the deal. It's an outline. But it usually *doesn't have space to cover many of the key details of what may make an acquisition "successful" for both parties.

KEY NOTE: NONE of the ideas below are from any one deal. Rather, it's an 'off the head' list of things I've seen matter across multiple deals.

1. Organizationally: Guidance on independence, integration(?), reporting structure?, approval structure, IT arrangements, WFH or vacation policies. Do you integrate with the buyers payroll and HR systems? Often these details matter intensely to your employees quality of life. I've seen these details go "good" or go "bad" with predictable outcomes. E.g. Try taking telling a team that's used to getting paid via Gusto that they're now going to be onboarded to a legacy ADP payroll system - it's unfun :)

2. Various financial Deal terms: Deal bonuses?. Pay changes?. Are you resetting vesting and or new equity? How might that work? Were you underpaying your team as a 'startup employees' - if so how does that change? Level matching? 401k matches - big companies are usually better here. Also, what about key employees/leaders you need to retain either to the deal close or +18 months?

Are they getting guaranteed severance for certain conditions? If so, what are those conditions? When deals get announced there can instantly be a lot of hurt/confused/angry people - so getting key ducks in a row before hand is essential. And trying to negotiate this after the fact will leave you constantly behind the "eight-ball" and with no leverage. Every deal I've seen has had some level of 'hurt feelings' by great people who felt valued and appreciated by the old org. now feel ignored and unimportant by the new org. The time to advocate for them is in this phase.

3. Team. Most members of the acquired team will leave within 2 years. I've heard figures by people who've done 100+ acquisitions that as high as 90% of employees will be gone. Obviously varies in every case. So how do you start planning for this natural turn over? How do you insure that the 'team' can stay strong even if the individuals change? Will the acquisition have the previous freedoms in hiring that allowed them to build a high velocity team in the first place?

There's a gazillion more things. In general, the more clarity that exists at the beginning, the better. And there's no way the LOI can contain (or should contain) even a fraction of that. But you certainly want it agreed to in writing.

What do you mean when you say “couldn't fit in the LOI”.

Aren’t LOI just written agreements? Your quote implies there’s a space limitation.

LOIs are 4 pages long by convention. They are also not legally binding and are just the blueprint for the definite agreement.

Great stuff. A long time ago there was a long thread on HN about this subject, the original thread got deleted, but I summarized it here: https://jacquesmattheij.com/how-to-sell-your-company/

A lot of these look like cases of sales of smaller startups (which is fine). The process he describes is almost identical with Enterprise sales, down to the role of the “coach” in the customer’s (acquirer’s) company.

Which makes sense, but framing it that way from the start will make it easier to navigate.

OP here: in these notes are processes for 2 multi-billion dollar sales and most of the points applied to those as well.

We sold last year and got to say all these points are pretty on target.

the process is grueling and by the end you just want it over to return back to normal life. I agree fully that getting everything done before the LOI is the way to go.

Learned a ton in this process and hope to be able to use that experience to help others as they plan to go through it.

>There are three types of sales: team, team & tech, and team, tech, & traction. Each one is more valuable than the last, provided the company grows. The greater the revenue, the more likely the acquirer prices a target on a revenue multiple.

I have also seen team + traction and traction only.

> There are three types of sales: team, team & tech, and team, tech, & traction.

There are more types. You can buy an entry to a specific market. You can buy users. You can buy to prevent your competitors move to buy.

that popop

sorry, fixed now.

Still happening :(

Did anyone find the close button on the most annoying popup ever? Had to leave the page.

It seems to go away after a reload.

Ditto. Evidently I failed the IQ test to find it.

I had to devtool remove it. Fortunately, they didn't obfuscate the popup like many seem to do nowadays.

it's way up in to top right corner.

Top right corner, grey 'X'.

Yes, the placement of the “X” was absurd. If it hadn’t been in a gutter I wouldn’t have found it.

Yes, but this type of thing is common for non technical people setting up blogs. it's probably a plugin that the author has no idea even exists.

I had to close the page without reading as I couldn't figure out how to make it go away. Didn't seem to have a close button on it anywhere.

> it's probably a plugin that the author has no idea even exists.

It says "Built with ConvertKit". To get rid of it on every site, until they change it, add this uBlock Origin filter:

  *##.formkit-slide-in

"Built with ConvertKit"

My guess: the author never tested it, saw a bump in email subscriptions after adding it, so they kept it.

well fart@fred.com is a new, eager subscriber!

There was enough screen real estate for me to read the text, like peering over a fence.

Is it gone cause I'm not seeing anything? You guys might need some more adblocking!

Had to switch to reader view. “X” was invisible.

I had to zoom out a few levels (ctrl- on windows/chrome), find the 'x' on the upper right side, close the popup, then zoom back in.

Really crappy experience, 'ConvertKit'!

"Please don't complain about tangential annoyances—things like article or website formats, name collisions, or back-button breakage. They're too common to be interesting."

https://news.ycombinator.com/newsguidelines.html

The greater problem is the upvotes which tend to push these things to the top of a thread, where they choke out interesting discussion. But it's harder to do anything about the upvotes.

I appreciate the reminder of the rules dang, but this literally blocks the article and people are unable to read the submissions. And the fact it gets upvotes means it’s a valid concern.

I agree that it's a valid concern. The trouble is that there's a competing valid concern, namely that such comments routinely get upvoted to the top of threads whenever the OP contains an annoyance (which is often!). Then they tend to sit at the top, choking out more interesting discussion.

Since there are competing concerns, we have to decide how to weight them. For this, it is helpful to know what one is optimizing for. On HN, we're optimizing for intellectual curiosity [1]. Common/generic annoyances are generally less interesting than specific new information in an article, so we favor the latter over the former.

It's not that the other concern is invalid, just a lesser priority relative to what we're optimizing for. Optimization is knowing how to rank valid things. It's easy to drop invalid ones.

The current thread is an example. The highest comments after I marked this subthread off topic are https://news.ycombinator.com/item?id=30386892 and https://news.ycombinator.com/item?id=30384256. It's better for either of those to be the top subthread instead of https://news.ycombinator.com/item?id=30384311, even though that popup is annoying.

You can't go by upvotes alone. Some categories of comment routinely get more upvotes than they should, relative to https://news.ycombinator.com/newsguidelines.html. This is a weakness of the voting system [2].

[1] https://hn.algolia.com/?dateRange=all&page=0&prefix=true&sor...

[2] https://hn.algolia.com/?dateRange=all&page=0&prefix=false&so...

This was helpful, thanks. I'm not the OP, but I once was scolded for posting a nitpick like the one being discussed here. I won't do it again, but I did feel like the OP that sometimes it is called for. I see your justification now and agree with it.

FYI: M&A seems to mean "mergers & acquisitions". The acronym is not expanded anywhere in the article.

The author probably should have stopped at bullet 7. The rest is clearly filler.

That's a lot of M&M's.

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