TC50: Exit Strategies, M&A Uncovered

TechCrunch CEO Heather Harde led a panel today with some of the biggest names in mergers and acquisitions, who have collectively been involved in deals totaling billions of dollars. Included on the panel were Michael Marquez (EVP of Corporate Development at CBS), David Lawee (Head of Corporate Development at Google), and Ted Wang (Partner at Fenwick & West LLP). Heather is also a M&A expert, as she was SVP Mergers & Acquisitions at Fox Interactive Media prior to joining TechCrunch.

Below are our notes on the panel. You can also watch it here.

Heather – To begin the panel, I’m really happy to introduce Michael Marquez, EVP of Strategy and Corporate Development at CBS Interactive, perhaps best known for acquiring CNET for $1.8 billion, and has also done lots of other medium and small acquisitions.

Next is David Lawee, head of Corporate Development at Google. In addition to Google he’s also been a 3 or 4 startup entrepreneur himself, and sold XFire to Viacom for more than $100 million.

Finally, we’ve got Ted Wang a partner from Fenwick & West LLP doing M&A work, focusing on lots of startups in the internet space.

Heather- I think we did this on third day so you wouldn’t get mobbed all week long.. Since exits are everyone’s interest, what are the types of companies you’re interested in these days?

Michael – Taking a step back, talking about mergers and talking about acquisitions. We don’t have a predetermined set, saying “we want to buy x number of companies a year or in a sector”. We’re an audience company and we’re trying to build the largest audience we can. The CNET acquisition is an extension of that – it gave us scale in key verticals, we’ll look to add additional verticals into that that. We’re looking at multitude of different ways to get into verticals, sometimes acquisition is it.

David – At Google we have strategic focus, but there’s more intuition and optimism that are into our acquisition strategy. We’re used to having to readjust every six months based on new trends, companies, factors into more than I would have suspected.

Heather – How many deals have you done this year?

David – I can say what we did last year. Last year it was 19 deals.

Heather – How are trends different from what you were seeing a year ago?

David – We’re in different phase of the internet investment cycle than we were a year ago. I think things will tightening up. We’re hoping to see more innovation instead of “me too” companies like tagging and other solutions that are simple to build. Things that may have taken 500k but don’t have great exit strategy.

David- I agree. We’re in a phase where we’re seeing a lot of further iterations of products already out there. There are lots of opportunities to fundamentally change especially in the media landscape. We look opportunisticly as well, for lots of innovation.. there’s lots of things that we miss out on.

Ted – if you look at overall environment based on macro economics. Last year buyers were willing to buy companies whose audience wasn’t monetized, but now that’s going to change. If you haven’t shown you can make money from users, it’s a harder story.

Heather – Are you saying we’re moving into a buyer’s market?

Ted – Absolutely, buyers are being more selective, there aren’t as many buyers out there willing to spend money. That puts advantage onto the buyers.

David- The public markets are tight, so that’s one less path, and that’s usually the default path for ambitions entrepreneurs.

Michael – Exit strategies are looking more limited. The way we look at it, from our vantage point, we don’t look at a buyers vs sellers market. We don’t say “lets do deals that didn’t make sense before”. It might change valuations, but doesn’t impact the decisions on number of deals we do. The macro environment is feeling a limited set of buyers.

Ted- When Michael says something makes sense, that means there are earnings they can make their money back in x period of time. Last year in some of the acquisitions you didn’t have that kind of thing.

Heather – You have been inquisitive internationally as well as in the US.

David – Google is international with developers all over the world. This gives us the ability to acquire software businesses in almost any country and plug it in. This year we acquired Begun, a Russian ad network which helped us accelerate business there.

Michael – We look at international opportunities, more local opportunities. CBS has global operations, as does CNET. But CBS is 90% US, so we look at that as an opportunity to build on top of that with an approach that is looking more local to build off of.

Heather – Are people thinking more globally about…

Ted -Because startup teams tend to be really small there’s a bias on executing in the first market. It’s hard if you have a 12 person team to have an international focus.

Michael – The way we look at smaller, earlier stage companies, it’s focus and excellence, sometimes that comes in one market even if we are looking at international strategies. We don’t say they’re not that strong in London or China, it may be be they’re strong in China and not in the US, that’s fine.

Heather – How do startups get in touch with you? Other people are encouraging cold call emails, three paragraphs, etc. How should people reach out to you?

Michael – Reach out to me directly. Knowing that the more you can be succinct and to the point. You know your business better than I do. Let me know why it’s interesting. It may not be about an acquisition, could be business opportunity I’m very much into seeing all of you and meeting you. But there’s email overload, so the more succinct, the better.

David – One thing that struck me as an entrepreneur, I always thought that if a company was in the same space as me, they would have heard of me. But that’s not necessarily true. The best thing is to try to build a relationship with a set of acquireers. At XFire we thought of it deliberately, we would form partnerships, deeper relationships.

Ted – You don’t have to wait until you’re ready to sell to reach out to their guys. Their job is to find interesting companies.

Michael – It has a lot to do with fit, if we don’t know about you and this is the first time, it’s tough to figure this out. You want to know the fit as well. Take the time to reach out make sure you’re known.

Heather – But honestly the deals you take time on considering, what percentage of them come through friends of friends, advisors, or directly?

David – I find it hard to break it out. Usually when we do something it’s coming from all of those things. We’ve heard about it, read about it on TechCrunch, it comes from angel networks etc. Companies building active relationships. My cofounder would make calls from 9-6 every day, and you don’t know which door you’re going to open, or if is going to lead to a good outcome. It’s true for both biz and cop dev.

Heather – Any common mistakes with pitches?

Michael- I think one of the big mistakes is coming in without an idea of the value you bring to us. I see lots of pitches showing what’s going on and that’s good but if it is actionable, you need to have a point of view on where that can go

David- I would say one of the challenging things is that you’re selling. You’re trying to market yourself as much as possible. You need to say things at the line of being credible. My cofounder would say we have a number of customers (we had 1), it’s a number, but it isn’t lying. if you’re caught in a lie, the deal is practically dead. Be as close to the line as possible.

Ted- The biggest mistake is that they assume that because Google has lots of money, 30 million isn’t a lot to them, and they’ll pay that for me. You have to figure out why is your company worth X. How does this fit into what you’re trying to do.

Heather – I remember where companies that had given thought to value of integration, some companies just sort of start pitches… The companies that were interesting to me were ones with value proposition.. Ted how do you encourage clients with respect to signaling this?

Ted – It’s a tricky thing. if you are ready to sell the company for whatever reason, you want to get a process going you need to create competition to maximize the value of the exit. People will pay because they need you, not because they like you. Set up bidding process where there’s multiple people at the table. On the other hand you can’t be dishonest and you have to be careful saying “you’re out of this if don’t do it by Friday”, don’t call them on Monday if they didn’t call you. It’s a game, not a deceitful game, but it’s about tactics.

Heather – Banks or not, and when?

Ted- What value can they bring to the process? Ask them. The key value is if you don’t have access to all the decision makers, the bankers do have that, they can get these guys on the phone pretty quickly. Number one value is access. They do help driving the process, they are experts on that. That’s what they do. They know the game.

Heather – Do you have a preference for working with bankers or not?

David – We generally see bankers on larger transactions, but the broader category of advisors is critical to managing selling your business. I’ve seen deals die because they don’t understand something that is being asked for is common and they’re surprised. People overplay their hands in negotiations. Figure out where you can push, and where there are obvious gives.

Ted – Be careful who you listen to. Sometimes you’ll get in a process and the person who the entrepreneur will pick is a guy who sold one company. Sometimes they just don’t know what’s going on. I hear some wacky things get said back to me. This is what I do for a living, so you know what the normal bid ask is.. sometimes people will say “this isn’t supposed to happen in deals” when it is..

Michael – I agree. There is a lot of value from someone who has seen this multiple times. There’s a set of terms and processes that are fairly standardized, so just knowing where those are. It can definitely get a deal going sideways when you spend lots of time negotiating terms that are fairly standard.

Ted – I have a pat speech. Entrepreneurs: you find a product, you find a solution, and get as much info on it as possible and move on to next thing. That’s what helps you innovate and bring to market quickly. In M&A that kind of behavior gets punished badly. You sort of want to be deliberate. Here are the 10 open issues, and we’ll give on 3 of them.. it’s a bad process. It’s a hard fit for entrepreneurs.

Heather – What’s one of the most overlooked parts of the process? Something that might be easily overlooked but is important.

Ted – If the deal goes through, you’re going to be working with these people. You have to have negotiations, but keep the tone civil, listen acutely to what the other side is saying. The points being raised, there’s a reason for that, take the time to understand the concern what they’re trying to accomplish. I don’t think it helps to pound on table and scream, hopefully you’ll be working with these people for a year or two, and your money might rely on that.

Heather -David and Michael, maybe you could talk about a recent success.

David -My favorite deal was Keyhole. A relatively small acquisition, it was a lot of money at the time. That became Google maps, and the impact was amazing. At the time local data was presented in a list type format. Now local data is presented on a map. 4 years later almost all of the Keyhole employers are still part of Google. That’s one of our biggest wins.

Michael – CNET from a standpoint of the rationale and the way to the two companies are coming together, the integration. the complementary nature of the assets has made the integration go smoothly, hitting the ground running. We have been able to get customer wins as far as advertising that are already working well, leveraging power of promotional vehicles.. been exciting ride out of the gate.

Heather – Big deals vs small deals.. what are some of the insights you have for some of the smaller deals, what makes a good fit?

Michael – With smaller (earlier) companies, you’d thin of that much the same way you’d think about your own business plan. Think about this in broader context, you know the acquirer. It’s a collaborative relationship now. With early stage companies they don’t realize that they have to do something different now, don’t realize they have access to new assets.

David – At Google we don’t really think of size of the deal so much as impact. A lot of the best deals have been smaller companies. YouTube was a fairly small number of people but huge price tag. Urchin has become google analytics. Writely helped us get into online docs, shared docs. Writely was three people, changed direction of the whole company. In terms of global impact that’s one of the things you should try to assess.

Ted- Two points. You want to sell how you’re going to be able to take your tech and really make it worldwide. And take it to an entirely different plane. Realize they’re behind you, the team is really important. Want to go through M&A process telling how excited you are to be in this new company, if you’re not excited about being in their company… it’s going to be a bad fit, going to be tension. If it’s a small team early stage, they will try to keep you.

-Open to questions –

Erick Schonfeld – What was the worst deal you guys did in the past year or two?

David- I can’t imagine in the last year or two.. No deal has gone sideways relative to expectations. Generically a bad deal is one where people leave. where employees don’t stay with it.

Michael – A lot of this has to do with talent and the people there. The worst deal is where you buy company and everyone leaves. We haven’t had that occur..

Erick Schonfeld – For Google it seems like you’re looking for new tech you can plug in to the existing economic engine, are there deals where you see interesting revenue models where google can expand upon?

David – I think we’re very tech oriented relative to other companies. Tech is very important at Google, has been a component of a lot of acquisitions that we’ve done. Thinking of Keyohle would be an example that. We could have built Google analytics, but the faster better strategy was to acquire Urchin. DoubleClick was a build or buy strategy, I think they had great market share and presence. Extraodinary talent – jobspot. Tech is important.

Q – Serial entrepreneurs say there’s valuation and terms, and that terms value more. In M&A what is most important outside of actual valuation/vesting period?

Ted- Most important is when you get paid. Timing, contingency type payments, things like escrow.

Q – David I have a question about Google. What are Google’s ambitions in the social networking space?

David – When we started Orkut, it as a 20% project, that has grown. Also OpenSocial, but that’s our strategy to date.

Q – If the acquisition process has been started how do you feel about the entrepreneur going out and shopping the company about. Does that annoy you or derail the deal?

David -It’s an accepted part of the process. Any savvy entrepreneur is going to try to make a multiple bidder situation. It’s perfectly acceptable, but there’s a point at which you declare that you will no longer continue to shop the company. There are strong repercussions could tank a deal if you break that.

Michael -We’re aware there are multiple conversations going on, but there’s that point when you make that decision, when you make that point, it is an exclusive conversation.

Ted -Some interesting gymnastics can occur right before that agreements, certain people have been doing stalling tactics. As long as you don’t overplay your hand you’re fine (don’t say you’ll get back at 5 pm, you’re running a risk). Doesn’t mean you have to but people will pull off.

Q – What things in due diligence make a mess out of the deal.

Michael – One thing. That I would give to everyone would be just the awareness, that a lot of founders selling companies for the first time. Make the buyer comfortable with what they’re buying. Obviously there’ s a staging process. But just an awareness that everything is being honest, because it will come through at one stage or another.

David – Thinking back to companies that I started I am amazed with how many decisions were made that affected later things within 24 hours of incorporation. You can wind up with a set of equity not contributing to the company. At very early stage of company have to be very thoughtful about people you’re bringing on, giving equity to. When you buy someone, want to see as much as possible going to founders.

Ted- There are two things to be careful on. Contracts with exclusivity on doing business may think I’ll never do x in Canada, so it’s okay if I give exclusivity to another company operating in Canada. But Google won’t be okay with that, so it can hurt you later. Second thing is privacy policy stuff. Acquirers don’t have lots of risk tolerance there. Get good council on that, and adhere to it.

Michael- David from Google, we saw that Google bought many startups, also partnered with SalesForce? Is there a line that you prefer to buy instead of create partnership

David- It’s a case by case basis. Yelp could have been something we’d consider acquiring, they happen to be great partner of ours in local search. Same true of Navtec, could buy or license their ata. We’re always looking to create most value for least of amount of money. If we can do it via a partnership, great.