Sharks, Bora Bora, & Engaging M&A Markets I: Markets “Speak”
In my last post, I introduced some of the most important and foundational KPIs that can be used to support a company’s growth-readiness, particularly during an M&A process. Today, I am going to start a conversation about engaging M&A markets by covering three ways in which the “market speaks” to entrepreneurs, often indicating that timing is good for a transaction. I’ll do so by using an analogy from a vacation with my wife a few years back.
Before I dig into the analogy, I must first state that I grew up on “Jaws,” as in the movie (and sequels) whose villain is a 20-to-30-foot long, man-eating great white shark. In my formative years, I was fascinated by the movie, by sharks, by the ocean, and by the fear elicited by it all. From my first viewing forward, if a shark was involved, I was “in.” Jaws the Nintendo game: owned it; visits to Sea World: only wanted to see the sharks; Shark Week: I think I’ve watched it every year since it premiered in 1988. And as I’ve learned more, my original ignorance-driven fear of sharks has greatly subsided and my knowledge-facilitated fascination significantly enhanced. Each time I viewed divers swimming freely with reef sharks on TV, I wanted to be in the water and each time I viewed tourists interacting safely with great whites, I wanted to be in the shark cage with them. So, when I found myself on a generously client-funded trip to Bora Bora following a closed transaction, my wife and I chartered a local’s outrigger canoe to “swim with the sharks.” What followed was an experience that both exceeded my shark-fan expectations and supplied me with an M&A-timing analogy that has served me well in the years since.
Sharks are a sign of a healthy ecology, as are an abundance of M&A actors
American oceanographer and explorer Sylvia Earle said:
“Sharks are beautiful animals, and if you're lucky enough to see lots of them, [it] means that you're in a healthy ocean. You should be afraid if you are in the ocean and don't see sharks.”
If you’re a tech entrepreneur, you want to see buyers “swimming around you” from time to time… and ideally, even if you don’t have time to talk with them all, you’d like to see a lot of them. This is why I decided to shark dive in Bora Bora: it is home to a lot of sharks; and I heard that the environment was almost ideal for a novice to safely meet them in their habitat.
Image 1: two lemon sharks swimming in Bora Bora
Overall, sharks have an unfair reputation due to some bad outcomes and their associated viral stories, irresponsible humans, the media, and a few tragic, out-of-the-ordinary predatory mistakes. However, by and large, sharks don’t want to cause humans harm and it is much more likely we can enjoy their beauty in the ocean as they go about their business. The same is true for private equity investors and strategic buyers. For every single bad actor, there are “schools” of buy-side groups that add tremendous value to the natural “ecology” in technology; I want them around as an advisor (and preferably lots of them) and entrepreneurs should want them around as well. We just need to take steps to ensure that conditions are “safe,” the diver (business) is healthy, and the water (M&A process) is protected against “man-eaters” (cynical, bad-actor-category buyers and investors).
How the market speaks
Before I get to the heart of my story, I want to lay out a few concepts about how M&A markets can indicate a company’s readiness / attractiveness as an M&A (or PE growth buyout) target. If potential acquisition targets “listen,” the market can “speak” to them about their M&A readiness in many ways, including the following three (each will be part of my analogy that follows in this as well as a second post on the topic):
- Potential buyers / investors “circling”: while not all buyers are created equal (we’ll cover this in a future post), meaningful, informed interest from potential M&A partners is a strong signal of a market that will value your business.
- Industry consolidation (other deals getting done): when competitors or complementary companies in your space start to be acquired, this is a strong sign. It can mean many things about a company’s prospects in a “deal” or “no-deal” scenario, but suffice it to say, such activity tends to signal a mix of growing opportunity and risk regardless of what the right decision is (deal or no deal).
- Other changes in industry: with every regulatory change, shift in technology landscape, new market entrant, and fluctuation in buyer/investor sentiment towards a particular market, among other factors, the market is speaking. The message if often more nuanced than is true in the case of motivated buyers circling your business or acquiring others, but it is important to “listen” nonetheless. This is because consolidation tends to follow meaningful change, whether the consolidation comes with a premium valuation multiple or not. All things being equal, one would do well to interact with all opportunity in a way that makes the best outcome most likely and this includes appropriately addressing waves of change, even if the direction of the tide is unclear.
The surface vs. the market
On a perfect Wednesday in Bora Bora, my wife and I boarded our chartered outrigger canoe; it was 85 degrees, calm, and crystal clear (both skies and water). After spending some time with a school of stingrays and a few black tip reef sharks in the lagoon’s shallow water – and in a heavily chaperoned environment – it was time to swim with the sharks in their habitat. To do so, we ventured past the safety and tranquility of Bora Bora’s lagoon, beyond the reef, and into the deep, royal blue Pacific Ocean. Candidly, not only were the waves and current noticeably more aggressive there, it was much deeper (about 40 feet to the bottom) and felt less safe. I was glad to have an experienced local with us (insert M&A advisor plug).
To attract some reef sharks to our outrigger, our guide “chummed” the surface, tossing a handful of fish chunks into the water; and before five minutes were up, we noticed a few shark fins here and there. By the way, in this analogy and especially in the case of a bootstrapped business that has previously been “under the radar,” the “chum” that stimulates M&A interest might be any of the following, among other stimuli:
- Inclusion in the inc5000, Deloitte Fast 50, or another growth awards list
- Strong placement in Gartner’s Magic Quadrant or other research reports
- Industry-leading reviews in Capterra, Software Advice, or G2 Crowd
- The announcement of an exclusive b2b partnership or other compelling press
- Receipt of an industry award for innovation, a top product or service, or other quality indicator
- A company’s robust headcount additions in LinkedIn, a strong growth signal for a bootstrapped business
- The Company’s position as benefiting from trends and megatrends, associated articles, and organic search results related to the same
The key takeaway here is that it is in buy-side M&A actors’ nature to “sniff” out quality targets, just as it is in a shark’s nature to sniff out food. When a business is of high quality, especially if it is a product-first company, at some point, a mix of private equity and strategic buyers are bound to take note. When they do, it is often a strong signal that your business is ready for the market if its owners feel the same way.
As was the case with dorsal fins signaling a good environment for my Bora Bora shark dive, so it is with private equity and strategic inbound interest as a sign of a potentially strong M&A market for your company. In the best cases, it may even surprise you just how much latent market enthusiasm the inbound interest is in a signal of. This is certainly true in many of the best M&A deals, just as it was in my shark dive when I “dove in.”
After a half-dozen fins had signaled the arrival of their shark owners, our local guide told me to “go ahead; now is good time to swim… I dive also in a minute,” with a hand motion signaling that I should jump into the water. While I now admit to having been a little apprehensive about jumping into open water sans guide, our guide seemed so nonchalant about it all that I hopped right in. What I saw under the surface took my breath away.
Not only were the sharks attached to the half dozen fins I had seen at the surface swimming with me, but so were no less than 50 of their family members and friends. Now, I consider myself as one to enjoy new experiences, to be calm under pressure, and to be more thrill-seeking than timid. However, in the middle of the Pacific Ocean sans guide, with the boat drifting away from me, and in shark-infested waters, I was more than a little anxious. Watching the video I took during the experience from dry land, it is clear how excited I was; I thought I had been pretty calm and was slowly following the sharks as they circled around me. However, what the film shows is that I was scanning the landscape QUICKLY, not spending enough time with any one shark to get a true sense for its majesty. Now, this calmed down quite a bit once my guide entered the water, I was more comfortable with my surrounding, and after I had taken some deep breaths. Thus, I still ended up with some awesome footage of the experience. However, my initial few minutes of footage certainly did not show me to be a calm, seasoned shark diving pro despite my aspirations.
For the entrepreneur considering M&A, there is a strong parallel: in every process I have ever been a part of, when inbound interest is present, there is always much more interest beneath the surface once you “jump in” and engage potential partners in a process. And, in many cases, the best partner (strong strategic, cultural, and economic [valuation] fit) is often one that did not present itself before the process (i.e. you jumped in). However, it is very likely that you will feel out of your element, unsure, overwhelmed, and potentially in danger of a bad outcome without the proper planning, fitness (business health and prep), equipment (process architecture, knowledge about buyers, materials, etc), and advice (insert second M&A advisor plug).
This raises the question: how does one identify the right buyer? This is something I will cover in much more detail in a future post. I’ll also introduce a few nuances to this equation and why entrepreneurs should always identify and understand what the full market has to say before closing a transaction (i.e. “run a process”). A related question is “why can’t I wait for the single best partner to find me?” I’ll get to this question as well as whether the buyer version of “Jaws” exists, how to protect yourself, and other factors related to “the dive” / M&A process in my next post. Stay tuned!