The Keys To A Successful Acquisition At Google, Twitter Or Yahoo
Google, Twitter and Yahoo are three of the most acquisitive tech companies. Corporate development representatives from these companies talked about how they seek to create successful deals at an event yesterday at Orrick.
The process of meeting and understanding how a selling company fits with an acquirer can be broken down to three steps, as they talked about in this earlier post. But besides those meetings, there are a number of issues that need to be resolved for deals to move forward.
Many startups are concerned with sharing trade secrets or other confidential information with potential acquirers. (We hear that question at Exitround often.) But Dave Sobota, director of corporate development at Google, says he encourages startups not to share secrets that would be confidential particularly at the beginning. “I always tell startups I don’t want an NDA. Don’t share confidential info with me. Just talk to me like I’m a reporter,” he says.
Then the two sides can get more serious step-by-step as they build trust on both sides. Later on, it’s possible to get an NDA in place, he says.
Google (and other large tech acquirers) will sometimes bring in a “clean team” to help evaluate a company. No, this is not a radioactive clean up team. It’s a team at Google–separate from the deal team or product team involved–that evaluates the selling company just on their technical skills. It’s designed to shield a buyer from potential law suits that could result from employees learning secrets about a potential acquisition target.
“If necessary, we’ll bring in a clean team,” Sobota says. “We don’t want to be exposed to trade secrets of target companies. It hurts us to be exposed to litigation. We’ll bring in a clean team who doesn’t work on the (same) product at Google to evaluate the technical chops of the acquisition but don’t share anything they learned–just the results of the evaluation to decide whether to move forward.”
The clean team also prevents top teams at an acquirer being legally “tainted” on a project they are working on. For example, Google may have a top team working on a top priority project. But if that team meets a seller in the same space and talks but then Google doesn’t buy it, Google could theoretically be sued by the seller if that Google team goes on to build something similar or related–even if Google was already working on it separately from the company they met. The clean team usually is kept completely separate, keeping separate notes, and so on, from the main deal team and product or engineering teams involved.
Valuation of the selling company is obviously the issue that many wonder about. Buyers typically have comparables from other deals they have done. Yahoo evaluates factors like the value to Yahoo for engagement, time on site and other metrics, says Aaron Crum, co-head of corporate development. But admittedly, for companies with little or no revenue, pricing models can all go out the window, he says.
Two major points for valuation are price, and then team compensation and retention, says Jessica Verrilli, principal, corporate development, at Twitter. The acquirer typically looks at a specific roadmap and how long it will take to launch something. Then if the new company will push up its schedule by say one to three quarters because of the acquisition, the acquirer figures out how much that speed is worth to it.
The value of the deal also is based on the idea that if the team leaves on the first day at the new company, the acquirer gets nothing, particularly if it’s a talent deal. That’s why incentives and retention are part of many of these deals.
At the same time, while there are comparables, the range for prices paid per person in acquihires is huge, says Google’s Sobota. A Ph.D. in machine learning can receive something quite different from someone just out of college.
There are typically three components, particularly for talent deals, to the valuation of an acquired company, Sobota says.
1. Payment to cap table: This pays back the shareholders of a company, particularly venture investors, if there are any. Depending on the particulars, Google may ask the founders to “unvest” part of their shares and re-earn them at Google. This is a way to incentivize founders to stay at the company.
2. Stay bonus to founders/employees: This is designed to keep founders staying at the acquiring company and at Google and Yahoo is typically paid in cash. In many cases the majority of the considerations are paid near the back end of the retention time period, Sobota says.
3. Standard offer letter: This includes traditional employee salary, restricted stock units and health benefits. This tends to be the smaller of the three pieces.
Yahoo’s Crum typically doesn’t like to do milestone earnouts, preferring to use payouts tied to how long the founders stay at the acquiring company. That’s because at some time period after an acquisition, perhaps two or three years later, there are always disputes about these milestone earnouts. That could be an argument about not getting enough server time or not getting enough sales support, he says.
LONG TERM SUCCESS
The successful retention of acquired teams often has less to do with the deal structure and getting the perfect purchase or retention price than with other things on the job that make a team happy, Verrilli says.
“It’s more: does the team have ownership on initiatives that are high impact for the company and are they empowered to do what they talked about,” she says. “Corp dev is a lot about emotional intelligence to really get to know people and set them up for success. If they’re not happy and engaged, even a strong retention package probably will not get them to stay. They have other options. That’s why it’s so important (for startups) to get to know who you’ll work for and what they’re building.”
One example of a success in that vein was Cabana, which Twitter acquired in October, 2012, Verrilli says. Cabana was acquired specifically to work on the Twitter Cards product. The seven-person team hit the ground running at Twitter and four months after the acquisition launched Cards.
The Cabana cofounder was successful, so he was pulled in to help with diligence on another acquisition, Crashlytics. As a result, he was promoted twice. That provides real long-term value to everyone involved–if the company empowers leaders and gives them opportunity, she says.
Another key to successful acquisitions is checking in regularly with teams that have been acquired after the deal. Yahoo, Google and Twitter all have teams that do this at regular intervals to make sure that the integration is going well. The goal is figure out if anything is not working as planned and fix it to keep everyone on the same page.