Tips for Getting Acquired (and Acquiring Others), from Eddie Pasatiempo of The Clarion Group

Getting bought out. It’s the exit strategy of choice these days. With the IPO market drying up, venture-backed companies need to get acquired to provide a payout for early investors. Whether it’s Microsoft buying San Francisco-based Powerset or CafePress acquiring Seattle’s Imagekind, there is an art to doing these deals, and startups and big companies alike don’t always get it right.

In fact, they usually don’t get it right. Seven out of 10 acquisitions fail, says Eddie Pasatiempo, a partner at The Clarion Group (and an Xconomist) who does management consulting on mergers, acquisitions, and other deals. What does “fail” mean? It means the original goal of the acquisition—whether it’s to grow revenues or integrate products—is not met. Yet “every company is looking to fill a portfolio gap,” he emphasizes, meaning that opportunities for deals abound.

To get some tips on the acquisition process, I sat down with Pasatiempo yesterday. He works out of the Kirkland office of The Clarion Group, and his previous experience includes 15-plus years at IBM and senior executive positions at Captaris in Bellevue and Korn/Ferry International.

Pasatiempo laid out the three basic steps to an acquisition. These are deal identification (selecting it), deal execution (the actual buy), and deal integration (merging the companies). The last one is probably the most difficult to get right, he says. That’s because different departments in the resulting company—finance, sales, marketing—have their own objectives, and since the deal is a difficult process, there’s an overall tendency to meet some but not all of these objectives. “What people miss is they forget why they bought the company in the first place,” he says.

There are other pitfalls from the buyer’s point of view. “Usually companies do good financial due diligence,” says Pasatiempo, but they might not spend as much time on other important factors such as the talent, product capabilities, and the strength of competitors the acquired company is up against—and so these might be misjudged. To learn about these factors in depth, he recommends spending time with the acquired company’s customers beforehand—five of the most satisfied, and five of the least satisfied, for instance.

In general, acquisitions become more difficult the larger the companies are. “Institutionalizing mergers and acquisitions in a big company is very, very tough,” says Pasatiempo. Still, there are some standouts in the tech industry. Over the past three to five years, he says, IBM has become one of the best in doing acquisitions of software companies. It follows a formal process, and people from the CEO down to lower management have ownership over this process, which includes dedicated full-time workers—not people doing it on top of their regular jobs, as is the case in some other places. To make an education analogy for acquisitions, Pasatiempo says, IBM has a Ph.D., while many other big companies are still in high school, in terms of maturity and capability. (For the East Coast perspective, see Bob’s and Wade’s stories on EMC and IBM’s acquisition processes.)

Given the climate these days, I asked Pasatiempo for some tips on how to get acquired, from a startup’s point of view. He broke it down into three main points to consider:

1. Readiness
This is both in terms of finances—are you profitable?—and the technology—how good is your software, really?

2. Market position
“Take inventory of your attractiveness,” he says, “and make sure you look good… It’s like dating.” That means knowing exactly what value you bring to the market that others don’t.

3. Potential buyers
Make a list of who would buy you, he says. Also know explicitly what you’re looking for. Are you looking for a strategic partner to go to market? Do you still want to run the business? Or are you looking for an exit?

The most common mistakes on the side of companies looking to sell, he says, involve deal structure—basically undervaluing your company, or underestimating the complexity of doing a merger. “It often boils down to how good your investment banking is,” he says. So don’t do it yourself—go to an analyst or, if you can afford the fee, an investment bank to handle the deal.

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2 responses to “Tips for Getting Acquired (and Acquiring Others), from Eddie Pasatiempo of The Clarion Group”

  1. To Pasatiempo’s list of what should be stressed during due diligence, I would add Information Technology. The risks and impacts within the IT landscape can be enormous, and some scrutiny by seasoned M&A IT integration specialists is always a good idea.

  2. “Pasatiempo laid out the three basic steps …deal identification … deal execution … deal integration. The last one is probably the most difficult to get right, he says.”

    Actually, the reason the last one is often most difficult is precisely because many people think of it as a last step. Deal integration planning should be on the front burner from the beginning of the process, and should be one of the criteria for deal selection.