Member Insights

The Challenge:

The case at hand was brought by the CEO of a technology company whose sector was rapidly consolidating. He was discussing considerations for deciding whether to sell the company or continue to compete as an independent entity.

If you were in this situation, what would you do?

If I were in your position, I would engage in very discrete and controlled discussions with one or two potential acquirers. To prepare for this, I would study M&A documents that become publically available from competitors who have been recently purchased.

The company you have built is truly impressive with great customers, great technology and the potential to be the “last company” standing in this evolving consolidated industry we are seeing.  At the same time, it appears as though your investors have been relatively patient and supporting the company for over a decade and the company continues to experience a rapid pace of innovation. If I were in your enviable position, I would take pause, though, and assess the company’s risk exposure to the rapidly consolidating competition. In my experience, I have found it can be challenging to compete with larger rivals with a broad and diverse product portfolio because they focus on extracting a blended average gross margin across many products while smaller companies must maintain a minimum gross margin on a specific vertical to ensure there is sufficient cash flow to pay ongoing expenses. In essence, larger companies can subsidize slimmer margins on some product lines with winning fatter margins in other parts of the product portfolio. That’s the luxury of the large companies.

While exploring your strategic alternatives, I would continue to execute the company’s long-term strategy, since that is what ultimately builds your long-term value, and I would also continue to expand and build strategic channel partnerships. Yet, at the same time, I would study the M&A documents from recent acquisitions in the sector. These invaluable documents illuminate not only the deal specifics but also other potential buyers who had substantial interest. I would engage a banker to perform very discrete and controlled discussions with one or two companies. Finally, it is essential to keep these discussions limited to only a very few people, so as not to distract or upset current employees and customers. With this strategy, the decision to sell or stay the course will be much easier and grounded in reality.