Article Published: October 29, 2014
Article Published: October 29, 2014
By Mark V. Santo, Esq., Marco Q. Rossi Association
Invariably in the life of many a promising early stage technology enterprise, it will be presented with the prospect of merging or selling or co-venturing with a larger organization; an opportunity that dangles abundant marketing resources, a sure-fire channel to customers or a much-needed infusion of capital.
Indeed, large enterprises, particularly ones with significant market share in their served industry, continually screen for new technology offerings in order to fill holes or gaps in their respective product line-up. They have the deal dollars and the business development teams to chase down new technologies. For many innovative technology concerns (“Tech Company”), selling or merging with a large enterprise often provides a lifeline to continue in business with the promise of free riding upon a large, mature market channel. For these reasons and others, the deal landscape within the technology sector abounds with these types of strategic transactions.
However, many economists tracking M&A deals will tell you unabashedly that most mergers and acquisitions fail of their intended objective.
This may not be the fault of the various financial models underpinning a technology’s value; rather in many cases, it stems from the simple fact that it is very, very difficult, if not impossible, to project the ultimate utility of a technology in the post-closing world of the Acquirer’s everyday operations. As someone who has participated in billions of dollars of tech deals, both domestic and cross-border, either as internal legal counsel, chief executive or investor, I have seen significant money wasted and dollars left on the table for not understanding the intrinsic value of the target technology upon a post-closing basis—both from the Tech Company as well as the Acquirer’s perspective.
The lesson I learned is simple; only when a purchased technology moves from the closing table into the organizational structure of the Acquirer will the ultimate economic value of the purchased technology manifest itself.
Of course, this presents a very difficult challenge for the Tech Company since it must agree upon a valuation for its technology before any closing transaction occurs. This is particularly true where the Tech Company’s valuation is tied to the post-closing performance of the target technology. Furthermore, in the context of a cross-border tech deal, understanding the post-closing management plans of a foreign Acquirer are complicated by factors such as language, cultural and time differences, yet these must be adroitly managed as well.
In short, a Tech Company acts at its own peril if it does not soberly assess and understand the inherent deal risks lurking within the management ranks of the acquiring organization; risks which abound in both the intake and the subsequent deployment of the acquired technology. Therefore, knowing intimately the management culture, structure and organization of the Acquirer on a pre-deal basis becomes the Tech Company’s playbook, and one can only amass a winning playbook by performing “reverse due diligence” upon the Acquirer. Succinctly stated, the quality and extent of the due diligence upon the Acquirer’s organization must be as deep and thorough as the due diligence performed upon the Tech Company’s organization and its technology.
For those Tech Companies contemplating a merger or sale of their technology with another enterprise, or venturing with a partner, particularly with a larger organization, here is a series of due diligence inquiries aimed at ferreting out the Acquirer’s post-closing management plans for your technology:
Invariably, the information uncovered by these inquiries often becomes critical deal points, and the savvy Tech Company will insist upon them being memorialized in the definitive deal documents, thus becoming binding obligations on the part of the acquiring organization.
In closing, Tech Companies who have an ongoing economic stake in their technology upon a post-closing basis must undertake a “deep-dive due-diligence” into the management and operational structure of the Acquirer and its plans for the technology at issue. Failure to do so may prove fatal to your technology’s destiny, the economic returns you reap and ultimately your company, with profound consequences for your workforce.
Mark V. Santo is a senior international executive and lawyer and has worked in various global enterprises involving complex discrete and process technologies. He recently returned to his native city of Pittsburgh to open an office for Marco Q. Rossi & Associati, a boutique international law firm with offices in New York and Milan, Italy. www.linkedin.com/in/marksanto/