Restart with the End in Mind

Chances are you’ve heard Stephen Covey’s Habit #2 in his classic self-help book called Seven Habits of Highly Effective People: “Begin with the end in mind.” Or said another way by the author of the Peter Principle, “If you don’t know where you’re going, you probably will end up somewhere else.”

When a business is launched, founders typically have a clear end in mind. A successful company survives the first couple of years and finds its way to profitability or at least breaks even. Then a critical point is encountered where the CEO’s focus on “where we’re going” can devolve into a focus on “staying alive.”

An early 20/20 Outlook post tagged the resulting condition as “The CEO Dilemma.” The CEO lets the pressure to fix operational issues and manage cash flow dictate a daily routine of addressing those needs and neglecting his/her responsibility to relentlessly consider how to grow shareholder value.  Working in instead of on the business becomes a comfortable norm.

If this sounds familiar, realize that you can hit the RESET button by employing the 20/20 Outlook process. Understand how simply saying “if I build a great business, I don’t need to worry about my exit strategy” can keep you from leading the pack among acquisition candidates in your market space.

Instead “restart with the end in mind” by considering the sources that contribute to the value of your company’s product and service offerings. Drill into how relationships with potential acquirers and potential acquisitions can unlock and grow that value. And create and implement a rational plan to align your company with other organizations that can help your business reach its full potential and move into a leadership position.

I’m On a Mission!

In Bob Dylan’s song “Gotta Serve Somebody” he points out that, no matter who we are, we all have to make significant choices:

You’re gonna have to serve somebody
Well, it may be the devil or it may be the Lord
But you’re gonna have to serve somebody

The implication is clear for our spiritual life, but the broader principle applies in our work life. At the core of what drives us are competing priorities, and the one at the top will be the “decider” most of the time. What is the top driver in your work life?

What drives me personally is a passion for building effective business partnerships. Over the years, I’ve seen great ones lift companies to new levels of value and effectiveness. Much more often, I’ve seen poorly planned ones consume significant resources with little or nothing to show for the effort.

Three principles characterize the most effective partnership strategies – context, planning, and execution:

Context means understanding your own organization and its offerings in relation to the market they live in. What kind of company are we? What value do we deliver? Whom do we compete against? How are we unique? A simple positioning project can bring great clarity of thinking and purpose, yet it’s amazing how unclear the answers to these questions often are.  If you don’t understand your own company, don’t expect success in partnering with others.

Planning partnerships is imperative. Stephen Covey’s second habit “Begin with the end in mind” is based on ancient wisdom from Aristotle that’s often ignored. Once armed with a clear understanding of your market positioning, you’re ready to think about partnering and what you want to accomplish. What is your vision for growing the value of your company? If you clearly understand where you’re going, business partnerships will help you get there faster.

Execution of partnerships requires effort and resources. Why expend time and effort in creating a business relationship only to let it die from lack of care? A partnership needs focus in order to produce expected benefits. Increasing the odds of success requires architecting self-sustaining elements into the partnership from the beginning, and that can only be done successfully through clarity of purpose and a clear vision for growth.

Anonymous, my all-time favorite writer, said it best:

“Action without Vision just passes time.”

Technology M&A Is Accelerating

A few days ago, I posted links to interesting articles in an exit strategy update. Indications are that the next 12-18 months  will produce an increase in the acquisition of technology companies, so having an exit strategy in place and aligning with potential acquirers remains top of mind for CEOs. Let’s review some of the evidence.

One significant indicator is that tech companies have started using debt to raise capital. A recent WSJ article said that “the decision to take on debt breaks from tradition in tech, where companies have typically preferred to raise money by selling stock. Debt has become a more attractive fundraising option largely because interest rates are low… Turning to debt is an especially big change for software companies, which typically generate lots of cash and aren’t saddled with large one-time expenses like opening a factory.”

While the focus of the article was on the largest companies like Cisco, Microsoft, H-P, Oracle Corp., International Business Machines Corp., and Dell Inc. who raised more than $20 billion combined in 2009 selling bonds, smaller companies are following suit. Salesforce.com’s $575M debt offering and Adobe’s of $1.5B, both in January, mean that the acquisition drive is broadening.

Yesterday StreetInsider.com quoted an FBR Capital Markets report that “software vendors are flush with cash given the cashflow-rich nature of the software model and more than a handful of vendors have even recently raised additional capital.” The FBR Capital report even suggested some likely acquisitions:

So what should CEOs of smaller technology companies who want to grow shareholder value do? At a minimum, three things:

  1. Understand who your most likely acquirers are and keep the list up-to-date.
  2. Ensure that your company stays focused on activities that increase your attractiveness to those acquirers.
  3. Create partnerships with potential acquirers and other companies who make your company more compelling to those acquirers.

Whether you want to be acquired in the short term or the long term, your company’s value is in the eye of the beholder, and the most important beholders are acquirers.

Exit Strategy Update 04/22/2010

WSJ: Tech Firms Bulk Up With Debt
“The decision to take on debt breaks from tradition in tech, where companies have typically preferred to raise money by selling stock. Debt has become a more attractive fundraising option largely because interest rates are low. The shift comes as mergers and acquisitions are reshaping the industry, with a handful of tech giants that have huge cash hoards—such as Cisco Systems Inc. and Hewlett-Packard Co.—snapping up firms. Now smaller tech companies are hoping that adding debt will allow them to get in the buying game.”

Virtual Intelligence Briefing: AOL dumps $850M Bebo acquisition – Why big M&A rarely works
“Don’t pay product valuations for feature companies – It is a good strategy to acquire small companies to gain super star employees, cool new features, and access to new market segments. But, the acquiring company needs the discipline to only pay a valuation commensurate with a “feature” not a “product”. Don’t add lots of valuation for synergies that probably won’t happen, or for revenue streams that may not materialize.”

WSJ: Eating Into Apple’s Cash Pile
“With a market cap of around five times book, Apple could choose to use its stock for large-scale acquisitions. But as its market value is around $220 billion, this would need to be a very large-scale acquisition indeed. To give some perspective—and not to propose these companies as targets—U.S. software giant Oracle Corp. has a market cap of around $130 billion, while European leader SAP AG is valued around $60 billion.”

MercuryNews: Palmisano Needs ‘Bold Strokes’ to Sustain IBM Growth
“Under Palmisano, IBM has spent $25 billion buying companies. Compare that with at least $42 billion for Oracle and Hewlett-Packard’s $45 billion. IBM’s share price had risen 31 percent in the Palmisano era, versus 53 percent for Oracle and 165 percent for Hewlett-Packard.”

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.

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!

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