More and more tech startup founders are exiting with huge payouts, through mergers and acquisitions by strategic buyers.
On January 18, 2022, tech giant Microsoft announced plans to acquire video game industry holding company Activision Blizzard for a gargantuan $68.7 billion. In doing so, they might very well have set up the biggest merger and acquisition (M&A) deal of 2022 before the year has even begun in earnest.
This merger comes in a vibrant M&A landscape that has seen enormous growth after the COVID slump, hitting a deal volume of $5.85 trillion in 2021—a 64% increase from $3.5 trillion in 2020. As much as one-fifth of all these deals were in the technology sector, which received a 71% uptick in 2021.
And it’s not just big-ticket acquisitions that are driving this growth, as startups are also getting in on the action. By the middle of 2021, as many as 1,070 venture-backed companies had been acquired, totalling $91.9 billion.
The numbers paint a clear picture: Mergers and acquisitions are a powerful mover in the technology landscape.
Tech startup founders looking to make a grand exit would do well to get a piece of that M&A pie. This is even more ideal when strategic buyers come into the picture, as they have certain characteristics and behaviors that would make them more appealing to startup founders.
What are Mergers and Acquisitions?
Let’s start with the basics. Mergers and acquisitions refer to the process of two companies consolidating in some form. While both terms are often used to mean the same thing, they’re actually two different concepts.
A merger is when two companies, which may or may not be of similar size, combine to form a new singular organization. The new organization will have a revised executive structure and new ownership. Then the stock of both companies is released and replaced with new stock under the new organization’s name.
Meanwhile, an acquisition occurs when a larger company consumes a smaller company and takes over its assets. The smaller company’s name may continue to exist under new ownership and management, but often it ceases to exist.
Since the term “acquisition” carries a negative connotation, many acquisitions are instead referred to as mergers.
What is a Strategic Buyer?
Companies may have many reasons for engaging in acquisitions. Many fall under so-called financial buyers, such as venture capital firms, whose goal is to make investments in growing companies and eventually secure a high ROI.
These companies typically don’t operate in the same industry as the companies they purchase, and they don’t hold onto them for long. They’re also willing to pay less, as their objective is maximum profit from minimum expense.
In contrast, there are also strategic buyers, whose objective is to grow within an industry through acquisitions of other companies in their industry. In service of this goal, they may acquire competitors to for strategic interests like to take them off the market, expand to new territories, or add new products through their acquisitions.
Why are Strategic Buyers a Good Fit for Startup Founders Looking to Exit?
CEO of CoolSys and author of The Exit-Strategy Playbook, Adam Coffee, says: “In many cases, strategic buyers are a great fit for entrepreneurs looking to sell their business. You just need a working knowledge of how strategic buyers operate.”
Let’s explore why this is the case.
1. They’re willing to pay more.
Strategic buyers aren’t looking to make a quick buck. They’re looking to grow through an acquisition, and that means taking a much longer view—and a more strategic one if you will. That often means they’re willing to pay more for a startup’s assets than a financial buyer.
This translates to a bigger payout for a startup founder who seeks out strategic buyers within their industry.
2. They offer quick exit opportunities.
A financial buyer will often want the management structure of their acquired company to stay put, allowing it to continue to flourish and grow so that they may realize their ROI. That includes stipulating that the founder stays on board to manage the organization. This isn’t the ideal scenario for founders looking to exit within the next 6 months.
In contrast, a strategic buyer already has the know-how within their industry, so they may not need the original management to stay in place. If a founder just wants to grab their payout and leave, a strategic buyer is the way to go.
Strategic buyers also result in faster sales due to improved due diligence. A financial buyer may have to hire industry experts or outside firms to perform due diligence on an acquisition if they don’t know their industry. Meanwhile, a strategic buyer will know what needs to be looked at, and make faster and more informed decisions.
3. The acquisition will satisfy clients.
As the larger company acquires the smaller one, its services and operations may be folded into the parent’s. The larger resource pool and team size of the main company will be able to provide improved services to clients. You won’t have to worry about the people you worked with getting the short end of the stick.
Making a Grand Exit
No acquisition is ever going to be perfectly smooth sailing. Negotiations about deal size, founder retention and others all have a chance to be skewed in favor of the strategic buyer’s interests. And you may still wonder whether a financial buyer is the better choice for you.
If you have the option—they do have advantages, such as potential equity options, and maintaining your legacy and culture. For this reason, having a broker between you and a potential buyer is often the best way to make the sale.
About the Author
Cebron Group is an M&A advisor with an experienced team on both sell-side and buy-side mergers and acquisitions of tech companies and general industrials .