Are you keeping up with industry changes fast enough? Or are you being left behind? It’s no secret that technology is disrupting industries from manufacturing to telecommunications to retail.

“…The risk of being left behind because of technological disruption and change is driving companies to make acquisitions faster,” Steven Davidoff Solomon writes in Dealbook.

For many firms, acquisitions are the only way to obtain a new technology or product and remain a competitive player in the marketplace.

Technology firms are notorious for acquiring startups or smaller firms to gain the latest talent and cutting-edge products. For example, Facebook acquired new technology when it bought potential rivals Instagram and WhatsApp. At the same time it bolstered its position against Google.

Another sector that’s facing great disruption is the financial industry. Most think of traditional brick and mortar banks, suits and ties, credit cards, debit cards, etc. The reality is FinTech (financial technology) is reshaping the industry. PayPal, Venmo and Apple Pay are growing in popularity and traditional banks need to keep up or risk losing consumers. Traditional big banks are acquiring, rather than building, FinTech capabilities. JPMorgan Chase has formed a joint venture with On Deck, an online lending platform for small businesses.

The advantage of acquisitions, especially in a swiftly changing environment, is the ability to gain a new technology or product rapidly and in some cases immediately. A well-executed acquisition brings you a “ready-made” solution where once the deal closes you have access to new technology, new technology that your customers need. On the other hand, building your own solution can take more time, but in today’s fast-paced environment, by the time you develop your own solution, the market may have moved on. In addition, you’ll likely face some teething problems or setbacks as you begin to develop a solution.

If there’s a technology or product that your company needs to stay relevant today or in the next five to ten years, I recommend you consider acquisition as an option. A carefully planned, strategic acquisition can help you stay up-to-date and relevant in your industry.

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Yahoo says the private information of at least 500 million has been compromised due to a cyber-attack in 2014. In the biggest security breach to date, hackers gained access to sensitive information including names, emails addresses, telephone numbers, birth dates, passwords, and security questions.

The security breach has ramifications not just for Yahoo and its users, but also for Verizon, which is currently in the process of acquiring Yahoo for $4.8 billion. Even though the cyberattack occurred in 2014, Verizon only found out about it last week. As a result of the hack, Verizon could possibly walk away from the deal or renegotiate the price.

The hack on Yahoo highlights the need for functional due diligence in order to identify all critical information that could potentially impact a deal. Leaders tend to focus on financial and legal data during due diligence, however failing to fully research other areas of the business, including cybersecurity, can be detrimental to your acquisition. You don’t want to find a “surprise” after the acquisition closes.

Functional Leaders Critical to Comprehensive Due Diligence

Functional due diligence is one of the best ways to ensure you are making decisions with the most complete data. This means incorporating leaders from each of the functional areas of your business – IT, sales, marketing, operations, accounting, finance – early on in the due diligence process. These leaders are involved in the day-to-day tasks of running the company and have a high-level of familiarity with their functional area. They are specialized experts who can spot problems, identify solutions, and ask appropriate questions that other executives may overlook.

It’s best to have each functional leader develop their own list of questions based on their experience working in the functional area of your business and the overall acquisition strategy. Next, have the functional leaders from your company meet with their respective leaders on the seller’s side to gather the necessary information. Once each functional leader has met with their counterpart, you can compile the individual lists into one comprehensive data set that covers all aspects of your business in thorough detail.

An addition to identifying risks and critical pieces of information, functional leaders can help develop and implement your integration plan. They will be able to anticipate specific integration challenges you may have and help develop solutions to avoid these pitfalls. Involving functional leaders in due diligence increases your chances of a successful acquisition.

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Another blockbuster tech deal was announced yesterday. Verizon will acquire Yahoo’s core business for $4.83 billion to boost its digital advertising capabilities. The deal includes Yahoo’s search, mail content and ad-tech business, but does not include Yahoo’s shares in Alibaba and Yahoo Japan. The combined company will reach over one billion users. Verizon plans to merge Yahoo with AOL, which was acquired last year for $4.4 billion, to create a larger advertising subsidiary.

Verizon’s Strategic Rationale

Verizon is building is digital advertising capabilities to compete with the top two players, Google and Facebook. With the deal, Verizon will double its digital advertising business to become the third largest US internet advertiser with 4.5% of the market share.

Lowell McAdam, Verizon Chairman and CEO, said in a press release“Just over a year ago we acquired AOL to enhance our strategy of providing a cross-screen connection for consumers, creators and advertisers. The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising.” 

In building on its AOL deal, Verizon is doing what we call taking “frequent bites of the apple,” or using a series of deals to achieve its overall growth strategy. Using a multiple deals rather than a single transformational deal can have many benefits including focusing on a single reason for acquisition, adjusting to integration challenges more easily and minimizing the risk of acquisition failure. Fortunately, Verizon has already had some time to digest and integrate the AOL acquisition because integrating Yahoo’s massive workforce of 8,800 employees and 700 contractors will be no easy task.

Integrating Yahoo will be critical to growing Verizon’s digital ad business. In today’s marketplace, content is king and Verizon will need to produce and monetize exciting content in order to compete with Google and Facebook, who have users creating unique videos for free on YouTube and Facebook. Even with Yahoo, Verizon will still be far behind Google and Facebook who make up 36% and 17% of the market, respectively.

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As we near the end of the fourth quarter, everyone is wondering what will happen in 2016. Will the frenzied M&A activity of 2015 continue into the new year?

There seem to be mixed reviews on what activity will look like next year. The Intralinks deal flow predictor indicates a 7% increase in global M&A in Q1 2016, but Mergers & Acquisitions Magazine has been citing a downward trend in the middle market for the past few months.

On the other hand, on a recent Deal Webcast “2016 Middle Market Outlook,” dealmakers were a bit more hopeful, expecting to see activity continue due to the high levels of dry powder and capital on the sidelines, while they did admit there may be a slight downturn.

The lending environment will be similar in 2016 to what it was in 2015 and in the middle market private equity will continue to be highly competitive, according to Michael Fanelli of RSM.

Healthcare and Technology Will Dominate

The Affordable Care Act brought about widespread changes to the healthcare industry, spurring a wave of mega-mergers by massive pharmaceutical companies. Despite this wave of mega-deals, for the most part much of the uncertainty surrounding ACA seems to have worked its way out of the middle-market companies. Tim Alexander of Harris Williams says that by and large, healthcare has become less of a due diligence item for dealmakers, especially those in the upper middle market.

On the other hand, in the lower middle market, the ACA may still raise some red flags, especially for businesses with part-time employees or ones that don’t have healthcare plans at all. While some sellers may have thought about the impacts of ACA, many are waiting to begin talks with a buyer before engaging professionals to deal with these issues, according to Fanelli.

The focus on healthcare is not only due to changes brought about from the Affordable Care Act, but is also indicative of a larger health and wellness trend we’re seeing in the U.S. Expect shakeups in the consumer and food and beverage spaces as people focus on healthier, organic specialty products.

As for technology, there’s plenty of disruption that will continue over the next one to two years, with a constant flow of innovative startups. This continuing trend will have its own impact on the middle market.

The U.S. Middle Market Remains Strong

For the most part, all three dealmakers agreed that middle market M&A is much stronger in the U.S. than it is cross-border or internationally. Most investors see the U.S. as the locale where they can expect their highest returns. This regional focus is not unique to the middle market: In the first 9 months of 2015, the U.S. accounted for 47% of global M&A transactions ($1.5 trillion).

Engaging with Sellers Remains Critical

When it comes to deal-making, building a connection with the owner and sharing your strategic vision remain the critical starting points. There are numerous reasons why an owner may decide to go with a financial buyer over a strategic buyer, even though technically strategic buyers should have an advantage from a cash perspective. In our experience, the same has been true (less money for strategic acquisition vs. financial). What it comes down to is really understanding the owner’s priorities and what he or she wants out of an acquisition. Hint: It’s not always more money.

As Marc Utay of Clarion Capital Partners said, echoing one of our key principles: “Price is important, but not the most important thing. It [the company] is like a child to them.”

 

March madness is in full swing as basketball fans across the U.S. excitedly (or anxiously) watch the games. Hopefully your bracket has survived this weekend, despite a number of major upsets. As we wait for March Madness to resume this Thursday with the sweet 16, let’s turn our attention to another craze that is sweeping our nation: merger madness!

As of March 15 there were $308.3 billion in announced U.S. transactions, up 8% from the same period in 2014. While an uptick in activity comes as no surprise, this level of dealmaking is impressive. Only twice before has the year in U.S. M&A started off this strong.

M&A in healthcare and technology sectors has surged. Global pharmaceutical and biotechnology M&A has reached a high with nearly $70 billion in announced transactions – double the amount of 2014. Technology M&A also reached a 15-year high at $52.6 billion, a 4% increase from 2014 values.

Key drivers for robust M&A include improved economic conditions, high stock prices and confidence from executives and dealmakers.

Although dealmaker confidence levels are clearly high, they may actually have decreased from last year. According to a survey, only 54% of dealmakers believe 2015 will surpass the previous year’s M&A activity compared with 78% surveyed in 2014. To be fair, surpassing last year’s $3.5 trillion in announced deals may be difficult.

Either way, we can anticipate continued activity at significant levels. “Our perspective is that M&A is primarily confidence driven. It’s pretty high,” said Greg Weinberger, the Co-head of American M&A at Credit Suisse. More hostile M&A is also anticipated throughout 2015 as executives and shareholders aggressively pursue growth.

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How important is BlackBerry’s newest smartphone, the Q20, to the future of the company? Recently I had the opportunity to speak with CNNMoney about this. With Q20, which will be released in the second half of 2014, BlackBerry is returning to its core customers by offering them what they want: a hard keyboard, buttons, and secure BlackBerry servers.

Businesses should focus on customer demand to drive growth by thinking about what customers desire now and also what they will want in the future.  While the Q20 is a good start ─ it includes a hard keyboard, the basic feature core BlackBerry consumers love ─ I think it’s only half of the turnaround equation for BlackBerry.

The piece Blackberry is missing, or hasn’t addressed yet, is how it will capture future customers. Concentrating on current customers is important, but leaders must also try to anticipate the needs of those who are not yet customers to gain market share and propel growth.  As I mentioned to CNN, I don’t see a convincing argument for iPhone or Android users to switch to Blackberry with this smartphone release. Perhaps the Q20 is only the beginning stage in BlackBerry’s recovery. For now, concentrating on its base may be wise, but for future growth it will need to think outside the box.

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The biggest tech M&A disasters were the Time Warner-AOL $350 billion merger and Google’s $12.3 billion acquisition of Motorola Mobility.  In my observations, the greatest hurdle facing tech mergers is integration. Even where the strategy of the acquisition is solid, if the integration of the two workforces and assets is not executed properly, it will fail.  Even CEO Marissa Mayer, who has made more than 30 acquisitions since joining Yahoo in 2012, may be struggling with integration. Just last week she fired Henrique De Castro, her COO and the person typically responsible for integration.

Lessons Learned From Integration Struggles

Warning signs of the Time-Warner AOL disaster began with the press release they put out after consummating the deal. It contained lots of flowery language, but left everyone scratching their heads as to why the two companies were merging. There was also a culture clash. Executives struggled with integrating an up-and-coming young tech company with an established media mogul. Eventually, in 2009, Time Warner had to dispose of AOL.

Google’s purchase of Motorola Mobility in 2011 also failed to meet expectations and Google announced on January 29, 2014 it would sell the acquisition to China’s Lenovo. This loss-making division was supposed to usher in an era of new devices built entirely by Google. Unfortunately, Moto X, Motorola’s smartphone, performed poorly in comparison to comparable devices. Google’s failure with Motorola was partly due to issues with integrating Motorola with Google’s existing hardware division and with the company as a whole.  Perhaps Lenovo will have more success.

Amazon M&A Proves Bigger Is Not Always Better

The moral we can draw from this is that bigger is not always better. Although big acquisitions are the most visible due to widespread media coverage, they often fail to be truly successful.

Amazon provides an instructive example. Between 1998 and 2001, Amazon approached acquisition the wrong way, buying or investing in 29 companies across various industries from toys to car dealerships to financial services. Most of these acquisitions failed and Amazon’s stock plummeted from its peak at $106.69 on December 10, 1999 to a low of $5.97 in on September 28, 2001.

However, since 2004, Amazon has refocused on making smaller, strategic acquisitions. This is what I call “taking frequent small bites of the apple.”

Its most recent acquisition of social media site Goodreads, valued at $150 – $200 million, was tiny compared to Time Warner-AOL or even Google-Motorola. However, with Goodreads Amazon can build on its personalized recommendations and gain access to book fans. Amazon acquired TouchCo in 2010 for touch screen technology now used in Kindle Fires.  Building on this capability, Amazon acquired Liquavista, a mobile display technology company, in 2013. Amazon’s stock price is now $403.01 (as of January 30, 2014).

Small, strategic acquisitions allow companies to “digest” and integrate the entity. In all acquisitions, the devil is in the details. Although your strategy may be solid, if you don’t make sure all the pieces fit together, your acquisition is bound to fail. At the end of the day, companies, even tech companies, are made up of people. It is the people, more than the systems or technologies,that present the biggest challenges of integration. To overcome these, you need a strong leader with the wisdom and experience to combine different cultures while overseeing the operations of a newly merged company.

Welcome back and Happy New Year! 2014 is looking to be an exciting year for M&A. I was recently able to share my predictions and insights for the coming year on First Business News.

In case you missed the segment, you can view the full interview below.

Facebook’s $3 billion offer to buy Snapchat points to a growing number of mobile technology acquisitions.

Yesterday The Wall Street Journal reported Facebook offered $3 billion to acquire Snapchat. While Snapchat has declined, Facebook’s offer points to growing trend of technology companies acquiring rather than building new mobile apps.

Most recently, we’ve seen a string of acquisitions by Marissa Mayer, including Tumblr for $1.1 billion, in an effort to boost Yahoo!’s mobile presence. In June Google acquired traffic app Waze and April 2012 Facebook acquired photo-sharing app Instagram for $1 billion.

Acquisition is a powerful way for companies to get new technology quickly access new customers. Yahoo! acquired Tumblr in part for its 300 million unique visitors, many of who are teenagers. Facebook likely wanted to acquire Snapchat due to its growing popularity with teens. Teen users of Facebook have declined over the past year. By buying mobile apps, companies not only acquire new technology, they also broaden their customer base by acquiring new users.

 

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AOL has announced it will acquire Adap.tv, a video advertising platform, for $405 million cash and stock. Adap.tv’s proprietary technology allows advertisers to control their video advertising across different media channels, permitting AOL to provide customized advertising based on viewers habits and location.

Internet media companies are targeting video because of higher advertising revenues. Even Facebook, which is primarily a social networking site, will introduce video ads beginning in the fall.

With Adap.tv’s technology, someone watching “Friends” in New York at 3 a.m. may get a different ad than someone watching the same show in Colorado at 6 p.m. We’ve already seen some of this customized video advertising with Hulu and Netflix. Technologies like Adap.tv’s are making advertising more powerful and effective by getting the right ad in front of the right audience.

The AOL-Adap.tv deal is particularly interesting in the context of the Omnicom-Publicis merger that will form the largest advertisement agency in the world.  From an M&A standpoint, media and advertising companies like AOL are in transition and we are seeing major changes in content, delivery and distribution.

The Washington Post and The Boston Globe recently were bought by wealthy individuals, Amazon CEO Jeff Bezos and Red Sox owner John Henry. These papers were once extremely profitable, but now with print media becoming almost obsolete and advertising revenues sinking, traditional newspaper revenues have been cut significantly.

The advertising world is turning upside down. As users consume media on different channels, advertisers must follow. My kids do not watch TV, but they watch lots of video – online and on their phones.  Adap.tv’s technology is important as users move from traditional television to computers to smartphones and tablets. Financial Times reports 38 percent of smartphone owners regularly watch videos on their phones.

In an industry facing disruptions, advertisers must make changes to their existing technology or capabilities or they will struggle to be relevant. Those in any industry who stay on the sidelines will struggle to compete with other players. Companies like Google, Yahoo and AOL are expanding their capabilities through acquisition.

AOL will use Adap.tv to integrate advertising with video content, which AOL has invested heavily in. In 2012, AOL created the first live video channel for the internet, Huff Post Live. (According to AOL’s 2012 Annual Report).

AOL is a huge media advertising company with a wide range of companies, from websites like Huffington Post to AOL’s Sponsored Listings for advertisers. Some of the companies are heavily branded with AOL, such as AOL Mail and AIM, while others like Huffington Post, TechCrunch and Mapquest are branded separately.   It will be interesting to see how AOL will integrate Adap.tv with the rest of the company and how the competition will respond.

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Yesterday Yahoo announced its plans to buy Tumblr for $1.1 billion in cash, which has really grabbed people’s attention. Marissa Mayer has made about 10 acquisitions since becoming CEO in July 2012, as part of her overall plan to make Yahoo part of our everyday routines.  This is her biggest investment yet.

Did Yahoo Overpay for Tumblr?

Some are already questioning if Yahoo overpaid for Tumblr, which until now has failed to generate any significant profits. On the upside, Tumblr brings with it 300 million unique visitors each month, but Yahoo still needs to make money on the deal. It’s certainly going to be tough to generate the level of return that’s required when you make an investment that’s all cash.

I would characterize the Tumblr deal this way. You’re talking about an acquisition with a mere $13 million in revenue, so Yahoo is paying 84 times revenue. Some have said Tumblr could make $100 million, but that would still mean Yahoo paid ten times revenue. The proof will be in the pudding — that’s to say, Yahoo’s ability to actually grow the revenues of the business. It’s far from clear how that will be done.

In the short term, one of the biggest benefits of this acquisition is a huge spread of people now talking about Yahoo, from businessmen to tech gurus to the teenage and twenty-something users of Tumblr.  Think about it, who was talking about Yahoo a year ago? Clearly this deal has caught people’s imagination.

Yahoo’s Promise

One of the things Yahoo should be careful about is the integration of Tumblr.  Yahoo’s image as an old internet company from the 1990s could have a negative impact on Tumblr users. Young users are a fickle group of folks that can and will move on to the next technology if they see Tumblr become irrelevant.

Yahoo’s press release on Tumblr “promises not to screw it up”.  But if Yahoo plans to “not screw it up,” what exactly are they planning to do with their acquisition? How will Yahoo balance the need to create value and growth in that business, and build some connectivity with Yahoo, while also continuing to attract new Tumblr users?

Fall-Out From the Tumblr Story

This deal is likely to put a lot of pressure on other companies. CEOs will be getting calls from the board asking “What’s our strategy? What are we going to do? How are we breaking into new technologies?” Another issue that I’ve written about before is the amount of excess cash currently sitting on the sidelines. $1.1 billion sounds like a lot of money, but it’s only one-fifth of the cash  on Yahoo’s balance sheet. There’s a lot of money and a lot of movement in the marketplace right now, so you’ll see growing pressure on CEOs to make acquisitions.

If you’re thinking about acquisition, I recommend you remain strategic, and don’t take a completely reactionary approach. Even if “everyone else” is buying companies, your acquisition will only be successful with a strategic plan. As for Yahoo’s acquisition of Tumblr, only time will tell if the risk will pay off.

*For more on my thoughts on Yahoo and Tumblr, check  out my interview on Fox Business News.

 

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