Earlier this week, I attended the TechNW 2011 conference organized by the Washington Technology Industry Association (WTIA). The conference was very informative and full of interesting presenters and topics. The corporate development panel discussion moderated by Tom Huseby (General Partner and founder of SeaPoint Ventures) was particularly interesting for startups (and relevant to my practice). The panelists were Neeraj Arora (Principal, Corporate Development at Google), Ryan Aytay (VP of Corporate Development at Salesforce.com), Ryan Cooper (Corporate Development Director at Microsoft), and Amin Zoufonoun (Director of Corporate Development at Facebook), all companies that have grown a great deal through partnerships as well as acquisitions of other companies. The general discussion surrounded merger and acquisition activities and drivers from the perspectives of Facebook, Google, Microsoft and Salesforce.com.

Two specific questions relating to the value of investment bankers in the M&A context and timing of the M&A process stuck out because they are questions that frequently come up with early stage companies.

Do investment bankers add value to the M&A process?  And if so, where is the value?

Although each of the panelists had somewhat different perspectives, the general takeaways were:

  • None of the representatives from Facebook, Google, Microsoft or Salesforce.com had a strong reaction for or against the involvement of a banker in the process.
  • Facebook’s Director of Corporate Development said that for smaller acquisitions (which he defined as $50 million or less), most startups can get great advice from their venture capital investors, board members and existing advisors such as lawyers, so a banker may provide less value on such a deal.
  • Despite what a given banker may say in their sales pitch to a startup, a banker’s involvement does not validate a deal or a company’s value.
  • The real value a banker can bring to the process is in the pre-deal organization, term sheet negotiation and general herding of cats (on the startup side).  Google’s Principal of Corporate Development referenced their recent completion of an acquisition of a Seattle-based company that had engaged Cascadia Capital, and indicated that Cascadia was very helpful in just that – moving the process along quickly. I presume he was referring to Google’s acquisition of Picnik.

My experiences are generally the same as the panelists. In my opinion, for most startup M&A deals a banker’s primary value-add is in organization. A banker can also be helpful if there are multiple potential interested acquirors or if management needs help (on the business side) with the negotiation of terms or rationalization of the valuation – and particularly helpful if there is a bidding war among potential acquirors. Lastly, I believe that bankers can serve an important motivating role in forcing a startup’s management, directors and major investors to focus on a transaction and get on the same page (i.e., with respect to how committed they all are to pursuing a transaction, how aggressively and at what price they are willing to do so, alignment of value expectations, and where the company’s value may reside). This evaluation process can often lead to a company backing off a sale process and refocusing on development or fundraising efforts, (often both).

In certain circumstances bankers may add tremendous value (particularly in very large deals); however, a startup that has a strong board and an existing set of strong advisors (particularly in a relatively small transaction) may be able to achieve many, if not all, of the “value-adds” mentioned above without one.

How long should the M&A process take?  How quickly can an acquisition get done?  What is the ideal timing?

All panelists agreed that, when trying to acquire startups in the tech space, speed is important and time is your enemy. The ideal timing seemed to be a month between signed-term sheet and a signed-merger agreement.

Google’s Principal of Corporate Development noted that his sense of appropriate timing was between two weeks and two months.  Facebook’s Director of Corporate Development noted that he believes Facebook’s advantage is speed and indicated that they have “done deals in a couple days or a couple weeks.”

All panelists agreed that the two biggest factors that might slow a deal are a startup not having (i) its corporate documents in order and (ii) the necessary personnel available during the transaction or to meet with the acquiror (on the acquiror’s schedule of course).

In my view, there are three stages for an M&A transaction and the timing usually plays out like this:

  • The time before a signed-term sheet (i.e., pre-deal organization and term sheet negotiation) – this stage can be the longest and companies often get stuck in this “waiting room” for an indefinite period.  Once the acquiror is engaged to negotiate the term sheet, negotiations may take as little as a few days or may devolve into a slow evolution of terms over a couple months.
  • The time between a signed-term sheet and a signed-merger agreement – this stage can run from several weeks to a few months.  Since this is the stage where the acquiror conducts most of its due diligence, the length of this period will heavily depend on the startup’s organization (both with respect to its team and its corporate documents) and complexity.
  • The time between a signed-merger agreement and closing of the transaction – this stage can run from a few minutes to several months.  Sometimes, once the merger agreement is signed, all of the conditions for closing have already been completed and the parties are ready to close.  On the other end of the spectrum, if the conditions for closing involve a lengthy list of required third party consents, if the acquiror is a public company and required to obtain shareholder approval, or if the acquisition triggers Hart-Scott-Rodino (HSR) antitrust filings, then the period between signing and closing can be up to six months or more.