Of the many panels, pitches, and speakers presented at the Council for Entrepreneurial Development (CED) Tech Venture Conference this week, perhaps the most interesting was on the subject of mergers and acquisitions. The topic itself is interesting, but the caliber of the panelists made this session alone worth the price of admission. The panel was chaired by Brad Raymmond – the Head of Investment Banking at Stifel – Andy Cohen – VP of Strategic Development and Investments at Citrix Systems, Inc. – Dion Cornett – VP of Strategy at Red Hat – and Anil Patel – Director of Corporate Development at Google.

This panel was excellent in that companies represented – Red Hat, Citrix, and Google – all had very different approaches and strategies, as far as acquisitions, partnerships, and strategic investments. Further, all three companies represent different levels of activity within the acquisition marketplace – Red Hat has completed 17 acquisitions since 2001, Citrix has completed 26 acquisitions since 2001, while Google has completed 129 acquisitions in the same time period. Also, the three companies live in different markets – Red Hat is centered in the open source world; Citrix is focused on enterprise networking and mobility; Google has it hands in just about every digital vertical.

There were many, many topics discussed on the panel, but the main focus – as the conference was mainly for entrepreneurs and startups – was what each of these companies looks for in an acquisition target; a more apt name for the panel would have been “How to Get Acquired by Google, Citrix, or Red Hat.” Following this theme, several key attributes emerged for target acquisitions.

Foster and maintain relationships with those involved in you product/service space at the company, and the community as a whole.

This was true for each of the companies represented. In response to the topic question, “How do you source opportunities?” each gave quite similar responses:

Working with our business units. At Citrix we have a collaboration SaaS business unit, enterprise networking, application, desktop virtualization, and cloud platform. Each of those groups has General managers and product managers who are consistently going out and looking at new markets and whether that is something they want to address organically or inorganically.

– Andy Cohen, Citrix

Being part of the open source community offers some fairly unique advantages…by being part of this community, there’s always an influx of ideas and we can actually know well ahead of acquisitions which company, which person, which technology is good and which are not so good. and while I recognize that everyone in this audience may not be a part of software, you are part of a community. So I would say the lesson learned is: What are you doing to establish your brand, your reputation, your companies profile in the community, are you active in social media, the forums, the meetups and the things that your community engages in? Are you a known quantity? Those are the things that really make a difference when we look at an acquisition.

– Dion Cornett, Red Hat

We see quite a bit of our acquisition activity come just from internal constituents at Google that may not be the product area lead or general manager…they may just be individual engineers or product managers who know people. Its a very fluid community of developers and entrepreneurs that we live in, and we know that personal references mean a lot and so sometimes even from people who are not even necessarily in the same domain as the company they are recommending, we know that they can speak for the quality of the people involved and can describe to us in a little more detail than we might get, just through an external interaction.

– Anil Patel, Google

More or less, just focus on building a great product, and be active within the community, and these companies will seek you out. It is less about actually seeking out top-level officers, that it is about working within a community.

The acquisition is the very last stage in a long-standing relationship.

Again, this more or less fits with the above, but the way in which the question, “How well do you know the companies you acquire?” is quite telling to this attribute.

We have a mix…For example we acquired a company called Quickoffice… That was a company that Google had partnered with for a number of years…We got to know the technologists involved, and they were building something that we thought was very congruent with the direction that Google Docs was going, and the products that we’re building for our cloud applications…On the other hand, we often see companies that we’ve never know before, maybe seen from afar, but haven’t really interacted with them on any business basis, but again, sort of come to us with a philosophy and a background that’s very congruent with the way we think. Either technologically, because Google is really an engineering focused company…If we see, OK we’re building a new platform for video on the web with WebRTC and VP8 and VP9. If there are folks that are focused on that, we may not know them already, but the fact that they’re living in our technology world, means a huge difference to us, and sort of makes that first cut in the funnel for us. 

– Anil Patel, Google

For us there are a couple ways to do that. First, the importance of being in that community and understanding the ecosystem that you play in is really important…Understanding culture, understanding business model, making sure that the company really fits. I think you can do that with a partnership, by working together, by having a relationship, a touch-point…A lot of it is continuity…Its, you know ‘hey guys, here I am, and this is what I am doing, this is what I’m going to do, and in 6 months I am going to come back and show you.’ I think just building that relationship, whether through partnership, whether thats through potential investment, whether that’s trough joint-customers…We will, almost never buy a company that we have not had an existing relationship with.

– Andy Cohen, Citrix

When I work with an Accenture or with a Dell, or work with an hp, I’m the little guy in that equation, and so the question those guys always have for me are ‘what are you going to do for me?’ or ‘how much money is this deal going to bring me, because you’re the little guy and if you want my attention, your going to have to bring some dollars to the table.’ So that is sort of my same question when I am participating in a potential partnership with a smaller company…So be prepared for those questions.

– Dion Cornett, Red Hat

It’s almost always better if your relationship with Google starts with a product or technologist, rather than me…Having that be the foundation of your interaction with Google is a great place to start.

– Anil Patel, Google

Company Culture is One of the Most Important Factors

Much of the above quotes speak to this point, but Andy Cohen stressed that the cultural fit, and the ease of assimilation into a company is more important than a companies sales figures or customers. If there is not an alignment in goals or culture, the acquisition will not be a good fit.

Revenue is Important, but not a Disqualifying Factor

This is perhaps the most important factor that was discussed on the panel. The panelists argued that the utility and the prospect of improving the acquiring company, in terms of an acquisition target, is much more important than revenue.

Often times the company is worth no more to us with $10M in revenue than it was with $5M, or even $50M for that matter, because the way we’re thinking about it is the impact that they can make on our business. That is not going to be necessarily  driven by their existing mode of generating revenue.

– Anil Patel, Google

TL;DR

Though there are a lot of factors that go into an acquisition, it all begins with the relationship between the acquirer and the company being acquired. It is almost always best to build this relationship with product-level managers, or engineers. It is also crucial to be active within the larger community. If you build an awesome product that overlaps within a larger companies space, they will come to you. Also, while revenue and sales are important, they are less important that the quality of the product or service.

Much more to come from CEDTVC.