The recent plunge in the dotcom sector seems to be doing for mergers and acquisitions what Ally McBeal did for the miniskirt. With planned IPOs being pulled in record numbers, and with share prices dragging like the muffler on a Yugo, acquiring technology companies is suddenly back in style.
The irony of this trend is not lost on Michael Heller, chair of the emerging business and venture capital group at Philadelphia law firm Cozen & O’Connor (www.cozen.com). “It’s only in the last few years that the tech market has gone from acquisition as an exit strategy to IPO as an exit,” Heller says. “Now, I think acquisitions will play a huge role in the tech industry again.”
The numbers tell the tale. In the first 10 months of 2000, companies initiated 2,019 technology-related M&A deals, worth $573 billion, according to Broadview International (www.broadview.com), a global information technology M&A adviser and private equity investor.
For the acquired, a buyout offers survival and much-needed capital. For the purchaser, there are two reasons to buy someone else’s science. “One is to acquire technology that can be incorporated into existing product,” notes Michael Ashby, vice president of corporate finance at San Jose, California-based Cisco Systems Inc. (www.cisco.com). “The second is to buy technology that gets you into new markets.”
Obviously, purchasing a company — and its technology — to gain a foothold in an unfamiliar market represents a serious gamble for the buyer. It also represents a serious professional challenge for the buyer’s CFO. Generally, CFOs oversee the M&A process because of their finance expertise and deal-structuring skills, not because of their knowledge of mass spectrometry.
Therein lies the rub. Assessing the merits of a high-tech takeover target often takes a CFO into unknown territory. For one thing, a finance manager must have some understanding of how a technology works, no small task in this age of micro-photonics. In those sectors in which a dominant technology has yet to emerge, the task gets even more complicated, forcing a CFO to examine competing, often bewildering, technologies.
What’s more, good science doesn’t come with a warranty. Even the most promising high-tech products have unforeseen glitches. Deployment goes slower than planned. Competitors claim copyright infringement. Batteries are sold separately. Worse, innovative solutions can get surpassed by more-innovative ones — call it the buggy-whip syndrome. And superior technologies may lose out to inferior ones.
Beyond technology concerns, CFOs must assess the human element in a high-tech takeover. Culture clashes, common in traditional acquisitions, take on new meaning in the technology sector. A botched integration can lead to an exodus of highly skilled, highly prized, and highly strung programmers, PhDs, and engineers. In the early days of an acquisition or merger, such a walkout can be a disaster. Loss of key employees can seriously hamstring an acquirer’s ability to generate a decent return on its money — let alone meet its hurdle rate for investments.