Mergers and Acquisitions as Exits for Venture Companies

The most common way for venture-backed companies to exit is through mergers and acquisitions (M&As). Mergers and acquisitions, despite often being clumped together, are two different things:

  • Mergers: Typically a merger is the joining of two similarly sized companies into a new single entity. Several corporate names reflect these mergers: JPMorganChase, GlaxoSmithKline, ConocoPhillips, AOL Time Warner, and ExxonMobil, for example.

  • Acquisitions: An acquisition typically occurs when a larger company acquires a smaller company. The acquired company may continue to exist as a company on its own with its same name but new ownership, or it may be folded into the parent company and its operations.

    In some cases, a smaller company will acquire control over a larger company, such as when Qwest acquired US West. This situation can occur through a leveraged buyout arrangement, though it is relatively rare.

For venture backed companies, M&As typically need to be cash transactions. In some cases, the transactions involve both cash and stock, an option that can work as long as there is not a significant lockup period, when the stock can’t be sold on the open market.

To identify companies that may want to acquire you, look for those that have a strategic advantage to gain from purchasing your company. Although a company may have many motivations to acquire you, focus on finding companies that can benefit in some of the following ways:

  • Vertical integration: Vertical integration is a strategy some acquirers use to control the full value chain — that is, the full process that goes into making the product valuable to a customer.

    An example of vertical integration would be an oil drilling and exploration company buying a refinery company to refine the oil they pump from the earth, a trucking company to deliver gas to retail outlets, and a company that has a lot of retail locations.

    Vertical integration makes sense for companies that already have expertise in your field because it may allow them to develop unique products or processes that they would not otherwise have access to.

  • Diversification: Diversification refers to buying companies outside of the company’s main line of business, and it offers almost the opposite value of vertical integration. Companies may want to diversify to offset potential market risks. An oil and gas company, for example, may want to diversify into solar energy to complement market volatility in oil and gas.

  • Rapid growth: Companies that want to grow quickly can often do so by acquisition. In this case, the acquiring company would be most interested in your customer list and will value your company based on your total sales and the likelihood of repeat customers.

    If you are looking at companies who would acquire you for rapid growth, your strategy should include customer retention data and growth rates for your company to show how you can help your potential acquirer grow quickly.

  • Geographic growth: If your company has plans to develop a regional or national presence, you may position yourself to be an attractive acquisition by companies that have strong, established bases within certain regions.

    For service-based industries, this strategy means acquiring a company that has people on the ground immediately rather than following the long pipeline of hiring, training, and building business within the territory on their own. Manufacturing- or product-based industries may look to acquire warehouses and shipping centers in new regions.

  • Economies of scale: Some companies want to get bigger so that they can benefit from economies of scale. A business may find that it can reduce costs by 20 percent or more by having a larger operation that can spread costs across many more units.

    Similar to rapid growth in that the acquiring company wants to get bigger, there is an important difference: Rapid growth focuses on benefits of increasing revenues’ economies-of-scale focuses on the benefits of reducing expenses.

  • Intellectual property: Many companies are now using acquisition as their R&D strategy. Rather than spending millions on internal research and development, these companies seek businesses that have successfully developed products or technologies that the company seeks. In these cases, your focus is on overcoming your technology risks; market development is not as important — a distinction that helps you decide how to allocate your resources.

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