Another plus: finance chiefs who do pull out their pens are getting decent deals, despite the increasing interest in acquisitions. It’s still a buyer’s market, although the distressed-firm markdown bin is not as full as it was 18 to 24 months ago.
Despite those advantages, CFOs are nonetheless moving more methodically, even on smaller transactions. That’s partly due to ongoing uncertainty about the economy, and partly a legacy of the recession. Those who relied heavily on leverage to do deals in the past are particularly cautious. “We don’t see folks rushing to the market with a checkbook to do an irrational transaction,” says Steve Joiner, managing partner for the southeast M&A group at Deloitte.
Smaller, but Not Easier
That caution is warranted. Despite their bite-sized nature, smaller deals come with challenges of their own. Less-sophisticated companies may have little-to-no revenue, unclear business agendas, and disorganized finances. They may have failed to protect their intellectual property. And they may have made concessions on agreements that will lead vendors or customers to expect new terms following a change in control.
A lack of historical data can throw finance departments off their due-diligence game. “The two things these companies get acquired for are things that CFOs tend to not be focused on,” says Matthew Bartus, a partner at law firm Dorsey & Whitney who represents emerging growth companies. “These acquisitions are not about revenue or earnings; they’re about the people and technologies.” As a result, the long-term worth of venture-backed companies can be hard to determine.
Such deals can also easily fall apart. Witness Google’s very public failed $6 billion bid to buy Groupon, the much-hyped shopping/social-networking site that offers consumers a daily chance to obtain deep discounts on local products and services. It’s a simple model, and lucrative: Groupon keeps half the revenue and passes the other half to participating merchants.
Even as it fended off Google, Groupon has been on a buying binge of its own, looking to buy copycat companies outside the United States so that it can simultaneously stifle competition and expand its geographic reach. In 2010, it bought six such businesses, including Citydeal, a site that was founded in Germany in late 2009.
Jason Child, Groupon’s CFO, says the company considers many things when deciding whether it should buy sites in certain regions or build new ones from scratch. “It depends on a combination of factors,” he says. “How long would it take [to do the acquisition]? How closely aligned are they with our approach and our style?”
Child says one of the main issues that arises when a big company targets a smaller one is the delicate business of approaching and winning over entrepreneurs who are used to working independently. “Entrepreneurs are excited about building stuff,” he says. “They are not excited about larger companies’ reputation for having more processes, more constraints, and more bottlenecks.”
For that reason, the human element of small-company transactions is a crucial consideration. “When you’re buying a company that’s run by an entrepreneur, that person may be used to calling the shots and won’t want to collaborate,” says Jim Cohen, executive vice president of mergers and acquisitions at Consolidated Graphics, a commercial-printing company that frequently buys family-owned businesses.