“Partnerships Don’t Work”

That may not be what you’d expect from someone who builds partnerships for a living, so stick with me as I explain.

We’re all familiar with the dreadful statistics about acquisitions and how the large majority of them fail to deliver the promised results. The reasons are many, and we could easily spend several posts on the subject. I haven’t seen similar stats on partnerships, but they are probably just as bleak.

A funny term popped up in the 90s called “Barney announcements” based on so-called “partnerships” that began and ended with a press release whose message echoed Barney – “I love you, you love me” – but with no real substance.  During the runup to the internet gold rush, this type of announcement was all too common.

Many CEOs feel like they’ve been burned by partnering. They’ve gotten behind a proposed partnership, even passing up other opportunities to put resources into it. After the partnership produces a Barney announcement and ultimately fails to produce – greater revenue, more market visibility, access to customers, or whatever was promised – the CEO forms a bad opinion of partnerships in general.

So why is it that so many partnerships fail? The most common reason is that the people pushing the partnership don’t do the hard work and planning required for success. Either they don’t understand the process, or they are unwilling to invest the time and effort needed to create a productive partnership. Gaining an understanding of all the interests of the parties takes time, and if partnerships are an afterthought, the time just isn’t there to maximize the chances for success.

The nicest thing about not planning is that failure comes as a complete surprise, rather than being preceded by a period of worry and depression.

– The late Sir John Harvey-Jones, Former CEO of Imperial Chemical Industries

The Genesis of 20/20 Outlook

While a CEO may have an intuitive feel for how and whom to partner with, the daily rush of keeping the business afloat makes it difficult if not impossible to focus on other areas. If the company is in growth mode, focusing on operations and cost while failing to inject significant resources into marketing and sales stifles growth. If the company’s revenue is flat, new vision for growth supported by a key partnership or perhaps an ecosystem of the right partners is needed.

20/20 Outlook is a process for cultivating a new growth vision for a company (or business unit) in the $5-50M range, then identifying and implementing robust partnerships supporting that vision. In today’s highly interdependent world, creating a breakout strategy must include beneficial relationships that enhance the value of the organization.

Fusing three disciplines – building successful partnerships, making strategic acquisitions, and directing product strategy – into a coherent framework and context for management decisions, 20/20 Outlook advances the exit strategy, all based on years of experience working with a multitude of high tech companies of all sizes.

The 20/20 Outlook process has three goals:

  1. Develop a clear vision that aligns the client company with potential acquirers.
  2. Create productive connections between the client and relevant potential acquirers, acquisitions, and partners.
  3. Collaborate and share responsibility for measurable results, transfer skills to the client, and gradually diminish dependence to the point of disengagement.

Software Valuations in 2010

Richard Davis at Needham is a favorite stock analyst. He talks to hundreds of high tech companies every year and thus stays close to what’s really going on in the market. In his most recent “Musings” in mid-December, he shared his thoughts on how software companies did in 2009 and what the outlook for valuations is for 2010.

In 2009 software stocks outperformed the S&P 500 by gaining 50% versus an average 23%.

2009 Software stock performance

Interestingly, while software M&A didn’t pick up as much as he expected, the average takeover premium jumped to 50%.

Software Stock Premiums 2009

This isn’t counterintuitive in a bad economy when stock prices are tanking, but “this one year trend has convinced CEO’s and Boards that it is an insult unless they get a premium of 50%.  This is delusionary and I believe premiums will return to a normal 30% next year.”

2010 looks to be a rebound year overall. I’m looking forward to seeing the level of M&A activity and whether premiums settle back to normal levels.

The data source for post is the December 14 edition of Needham analyst Richard Davis’s Musings. Needham & Company, LLC is a nationally recognized investment banking and asset management firm focused solely on growth companies and their investors. Founded in 1985 by George Needham, Raymond Godfrey, Jr. and David Townes, the firm is headquartered in New York City with offices in Boston, San Francisco, and Menlo Park, CA.

Assessing the Value of High Tech Companies

In a recent post, long-time friend and colleague Michael D’Eath speculated about how the acquisition landscape is changing, especially the extent to which roll-ups seem to be an increasingly frequent exit path for startups. Implicit in this process, of course, is how the startup will be evaluated.

A key component of the 20/20 Outlook process is assessing value in the eyes of potential acquirers. A value analysis framework I’ve found helpful consists of a total of 12 different attributes rated as “strong,”“credible,” “limited,” or “none.” In the diagram below, the 12 areas are built in 4 categories from the bottom up, starting with how flexible, patentable, and scalable the company’s technology is (“Credible Technology”).

Value Analysis Framework

Secondly, market credibility is assessed for how established the company is, the strength of the initial customer base, and how capable the company is in successfully delivering a solution (“Credible Market”).

Next, the health of the business is rated in three areas: vertical packaging, repeatable sales model, and repeatable delivery (“Credible Business”).

And finally, we make an analysis of progress in gaining a good reputation with the analyst community, achieving broad scale customer adoption, and market thought leadership is made (“Market Dominance”).

Assessing the current state of each attribute can highlight areas of weakness that need attention and perhaps more resources, as shown in this example.

Value Analysis Framework example

With respect to Credible Technology, this theoretical company has flexible and patentable technology that is still somewhat limited in its scalability. It’s in an emerging market (i.e. established market = limited) that hasn’t quite broken through to mainstream (i.e. still low on the Gartner hype cycle). I won’t drag you through each attribute, but you can clearly differentiate those that are driving up value and that need attention.

Acquisition Market Outlook

The timing of an exit is naturally influenced by overall activity levels in the market, and today’s market outlook for acquisitions is mixed. The pace of merger and acquisition activity has slowed down somewhat, but the picture is far from bleak. Large strategic companies continue to grow through acquisition. Private equity investors still have capital and are looking for opportunities to put it to work. Owners of private companies are looking for timely exit strategies, and prices are still strong for high-quality assets.

While there were several high-profile deals in 2008, the volume of software acquisitions M&A transactions decreased from the previous year. Fewer large-scale transactions occurred, while middle-market deals were more prevalent.

M&A Market Dynamics

Valuations were generally steady. EBITDA values in 2008 were down less than 2% year over year, and 2008’s median EBITDA multiple remained higher than 2006. Buyers still seem willing to pay solid prices for attractive acquisitions.

What are the characteristics of software industry acquisition activity thus far in 2009?

M&A Market Dynamics - First Half

Overall transaction volume dropped 10% from the same period in 2008, and aggregate transaction value dropped 27%. On the other hand, large companies like Oracle and IBM remained very active, and most people I talk to expect the acquisition market to rebound somewhat in the middle of 2010.

BerkeryNoyes provides merger and acquisition services for middle market companies. Each year they publish reports on trends in acquisitions for key industries. Most of the research for today’s post was drawn from information on their site, which is included in the 20/20 Outlook blogroll.

The CEO Dilemma

Leaders of high technology firms often face a dilemma: while they feel compelled to spend all of their time in their business, they realize they should spend more time working on their business. A high tech CEO has a finite amount of time that must be allocated across multiple activities such as overseeing operations, managing costs, marketing, sales, vision, and partnerships.

The reality of keeping a high tech business moving forward while maintaining positive cash flow often leads the CEO to focus almost all his/her time on operations and cost. With so much time spent on these two activities, they can become his/her comfort zone. Days can become consumed with adjusting business processes and managing costs.

While these activities are necessary, investors and boards want more. They want to see a clear path to a dramatic increase in the future valuation of the business, and they want to see the CEO spending time to accomplish this. How the CEO changes his/her own behavior usually takes one of two directions, depending on whether the company is growing.

If the company has a proven business model in an expanding market, the CEO needs to focus more effort and attention on marketing and sales to accelerate growth. The business model has been proven, and increasing the effectiveness of “turn the crank” activities must be the objective. On the other hand, if company growth has not materialized or has stagnated, the CEO must modify and expand the vision that drives the company in order to break it out of its slow growth mode. New vision and strategy often dictates more alliance-building and strategic partnerships to support the new vision.

The trick is to create a pragmatic framework for managing implementation of the new vision while continuing to keep operations humming and costs down. The 20/20 Outlook process was developed to address the dilemmas and challenges faced by CEOs desiring to grow the business and communicate more effectively with investors and board members. Augmenting the management team with  an experienced outside adviser enables the CEO to create breakout initiatives while continuing to manage daily operations.

CEO Activities and Zones

Source: Conversation with Executive Edge

Build a Viable Business, or Build Toward an Exit?

If you’re a CEO, board member, or investor in a high tech company, growing shareholder value is a top priority.  The obvious challenge is taking the right steps and avoiding the wrong ones. Two divergent views on how to grow value are commonly held:

  1. Focus on growing a viable business and let the exit take care of itself, and
  2. Base each corporate decision on your targeted exit strategy.

Business v. Exit

For years I was certain that the former view was the best one. Simply keep evolving the business with desirable products and services offered at a reasonable price with good support, then at some point you’ll be acquired or else the conditions will be right for an IPO.

In today’s increasingly competitive environment, I’ve reconsidered that position. Most companies find that an IPO is out of the question for now, so if they articulate an exit strategy, it’s “to be acquired.” While building the business continues to be important, the complexity of the current market landscape and, even more importantly, the speed at which the market and market perceptions change, demands a more sophisticated approach.

Taking a stand at either end of the continuum above can result in failing to reach the preferred exit. If you focus only on growing a viable business, you may survive but you may not trigger the financial event that the investors and shareholders want to occur. On the other hand, if you focus solely on the exit, the business can suffer and your company may be eliminated from consideration by potential acquirers.

The purpose of 20/20 Outlook is to ensure that the proper balance between these extreme positions is achieved, i.e. that the company’s value increases through relationships with potential acquirers and potential acquisitions while you continue to grow the business. The process defines clear steps that enable you to (1) view your company through the eyes of potential acquirers and potential acquisitions, (2) define a realistic exit strategy, (3) align your product strategy in light of what you’ve learned, and (4) define and execute partnerships that move you closer to an exit.

More on this next time. In the meantime, additional information about 20/20 Outlook can be found at www.2020outlook.com.

Introducing 20/20 Outlook

Near the end of 2008 after laboring in high tech companies for over 30 years, it became clear that some personal reinvention was in order. Wide-ranging experience in a multitude of roles yielded a perspective that friends have described as unique, and I wanted to combine what I’d learned in three leadership areas – M&A, product strategy, and partnerships – into a process that would benefit small to medium organizations.

In my role as chief marketing officer at Infoglide Software, I’m fortunate to work for Mike Shultz, a talented and experienced serial CEO who has also become a trusted friend. When I told him about my desire to help multiple companies, he was immediately supportive and was key in crystallizing the idea of 20/20 Outlook. He even offered to let me develop and prove the system by applying it at Infoglide.

Earlier this year, the 20/20 Outlook process began to evolve. While the goal of aligning efforts across the organization to support an exit strategy was clear from the beginning, defining the steps of this new methodology took significant thought and interaction with the management team before it began falling into place. 20/20 Outlook will continue to evolve but has already proven to be quite valuable in its current state.

In future posts, I’ll share thoughts and ideas here about how the process works and how it can benefit other companies. I hope you’ll come along for the ride and join in the discussion!

« Previous Page