Exit Opportunities: Leveraging Potential Acquirer Emotions

Last week, I shared 3 tips on how to start developing exit opportunities before your management team is seriously looking to exit the market.
This week, I will discuss how startup and expansion-stage company management teams can leverage potential acquirer emotions to better identify and position their company to take advantage of exit opportunities. Being able to effectively exploit or manage these emotions will maximize the likelihood of acquisition and also help you ensure a good revenue multiple on the acquisition.
Here are four emotions that can potentially trigger acquisitions:

1) Fear

Products that are deeply ingrained in the back-end of a company’s products are difficult and costly to uproot and replace (think core technology infrastructure). Consequently, companies that depend on less established company technology are avidly monitoring the acquisition market to identify other potential suitors, as they pose a potential threat on the stability of their products.
This inherent fear can be a significant acquisition driver, but not one that you want to exploit until there is a deal on the table, as it will likely scare away potential future customers and current customers as soon as their contracts expire.
All companies know that there is an inherent risk in using startup or expansion-stage company technology for core products. Customers that do elect to do so have established strong bonds and trust with the vendor over time that enable them to write-off part of the risk. That trust is out the door as soon as these companies see contrary behavior. This fear can drive a potential acquisition.

2) Feeling Threatened

Key players in a market actively monitor the competitive landscape of their key markets and the surrounding markets, so that they can identify oncoming threats and leverage their position to maintain their market position. Depending on market dynamics and anti-trust considerations, often a market share leader or another major player in the market will consider acquiring an up-and-coming competitor. They will see this option as the most cost-effective resolution to the threat. These types of acquisitions can often garner large multiples, as well.

3) Opportunism

When companies see a market opportunity is ripe and think that it offers great value to their business and great growth opportunities, they will evaluate all potential options of pursuing the opportunity. Typically, these companies will not be able to get their own competitive product into this space in time to take advantage of a market opportunity, so they will look to the market place for technology to allow them to do so.

4) Despair

A company in its twilight that is falling from grace (or on a seemingly unstoppable market free-fall) will often start investing its free capital into the acquisition market as opposed to in its own R&D, as they are trying to find their way back to relevance as quickly as possible.
HP under Leo Apotheker serves as a perfect example. In 2011, Apotheker knew HP had a solid balance sheet, but was weary of the commoditization of its core products, so rather than invest internally in R&D, he decided to turn to the market place and buy Autonomy. Similarly, Yahoo made several acquisitions from 2005 forward as it fought to remain relevant after Google won the search engine war, and its own R&D was not cutting it. This can be a great time to exploit a company’s position, as the seller has the upper-hand in this type of deal.

Managing these Emotions to Your Advantage

The key is properly handling these emotions and knowing when it is in your interest to exploit potential acquirer emotions to open up exit opportunities and maximize your exit outcome. Misinterpreting the time to leverage these emotions can not only ruin a potential acquisition opportunity, but also lead to customer and partner losses, so it is important to think through whether the benefits are worth the risks.
If you are in the process of trying to identify potential acquirers, I highly recommend reading my 4-part series on how to identify a potential acquirer. I also recommend reading my series on understanding your exit options that explains the most common means for market exit. Not knowing your options for exiting often means you are selling yourself short!