I ate a steak !
About bringing your company to an exit.
“I ate a steak ! For god’s sake, I had been a vegetarian for 10 years !” This was Andrew Mason of Groupon fame in a recent podcast I listened to. Andrew had been asked by his board to meet with Yahoo’s head of M&A, as Yahoo had floated a very interesting acquisition offer for Groupon. This was in 2010. Andrew really, really did not want to sell the company. He was so upset at the dinner that he ate a steak, his first steak in 10 years. He believed in his core, in his bones, that selling was absolutely the wrong thing to do. The company was on a tear, and he believed they could build a very, very large business, if they kept going as an independent company.
The most complex, the most difficult part of the journey of entrepreneurs and companies is, very often, the exit. People show their REAL color, somebody makes more money than somebody else, it is emotional, it is financial, it is the culmination of 5, 10 or 15 years of hard work. There are so many reasons why it is complex and difficult. Often investors don’t make it easier. Management can feel that they are left with all the commitments, promises and risks post transaction, and the investors just ride into the sunset with their mio’s. Or some minor investors squeeze out preferential treatment, as they may stand to lose less if a deal does not go through. Or management “goes native,” they side with a buyer, the buyer offers large cash and equity incentives to management that stays behind to get better deal terms overall. The stories are plentiful.
This brings me to a company called Heptagon. Luckily, Heptagon did not have all the difficulties mentioned previously, but it was a complex exit. Heptagon is a little known optical components company that was acquired by an Austrian semiconductor company listed in Zurich called AMS.
I was on the board of Heptagon for 8 years. The journey of the investment in Heptagon had so many twists and turns that it ended up being a case study at Wharton Business School, kindly adopted by Professor Michael Useem. Every journey, every company has a different story, but some lessons are universal. Heptagon was different from Groupon in that it had a CEO who was hired in 2010. He was not a founder, he was not a long-time employee, BUT he turned out to be brilliant for the job. The case study taught by Michael Useem can be found here :
Some of the key things I think about when my companies are nearing an exit, in light of what I learned with Heptagon, are :
· Is this a good place for the management ? Do they want the deal ? Culture fit is one of the most important aspects. Heptagon turned down a buyer that offered in excess of $1B due to concerns about culture fit.
· You can’t go public if your customer concentration is too high.
· It is a long journey. Start the dialogue early with your board and investors about exit, preferably as you take in capital.
· Companies like to buy companies they know. AMS and Heptagon had a dialogue that started in 2014.
· Bankers can be very helpful for market intelligence and getting your company on the radar screen with the right buyers. But talk to more than one. And manage the relationship(s) like you manage customers.
· If you don’t have the experience, bring executives on board who have been part of prior M&As or IPOs, but do it well in advance. We are talking several years. Your board can be helpful, but you need executives with you, shoulder to shoulder, to maximise your outcome. Luckily, the Heptagon CEO had been a transaction lawyer for a large conglomerate early in his career.
· Structure the transaction to get what you need. It sounds obvious, but one of the successes of the Heptagon transaction was that both sellers and management would benefit from a coming design win by receiving much more stock than cash at closing, and could then ride the stock appreciation as the design win was scaling.
· Be prepared for the fact that drag-along clauses are not automatisms. Smaller investors can try to squeeze concessions, as can larger investors, and often buyers require 90 or 99% consent from selling shareholders.
Heptagon is just one exit story. I have been part of 10’s of exits. Not all as successful as Heptagon, but always with new learnings. No one exit is the same.
You don’t NEED to eat steak … but start early and plan your exit.