In recent years, we have seen more acquisitions of start-ups by big corporations in the tech industry, healthcare, retail, fashion, beauty, food, and transportation. The benefits of M&A transactions in these sectors has been more widely recognized. For instance, for a start-up, partnering with a large corporation provides broader market access, deeper industry knowledge and accelerated brand development opportunities. From the perspective of the corporation, it means access to growing markets, new technologies, and tapping into niche skills, talents and entrepreneurial and agile culture.
Despite the surging interest in enhancing collaborations between start-ups and bigger companies from both sides, Accenture research estimated half of such attempts are to fail, and Imaginatik and MassChallenge’s survey found that 50% of the start-ups rated their experience in interacting with big corporations as “mediocre or worse.” An important factor affecting the start-ups’ ability to adapt to the new relationship is the hierarchical nature and the well-established but rigid governance of most large corporations, which tend to suffocate the creativity and agility of the target. Consequently, the target becomes frustrated and the innovation that initially sparked the partnership is stunted.
So how can we improve the situation? In an interview by Mergermarket of three experts in the start-up M&A filed (the Interview), the answer is fairly straightforward: much like parenting in the real world, when a corporation acquires a start-up, it has to be a good parent and foster the growth of the newly acquired company.
Although all of the interviewees agree that there is no one-size-fits-all integration model, a successful model should bring everyone in the merging entities on board and be in informed by the strategy of the parent. Once the partnership is underway, experts such as Jamie Leigh have suggested that the parent ensure that open communication channels are being developed to empower entrepreneurship, and allow for experimentation, while at the same time providing financial and operative oversight and support.
Further, corporations need to be flexible and open to changes in order to avoid post-acquisition apathy. A report by hello tomorrow and the Boston Consulting Group echoed this point and suggested that the parent should avoid imposing its existing governance model on the target, or going too far in the other direction and adopt a laissez-faire model. A tailored governance plan should be in place that strikes the right balance between swift decision making and appropriate risk management. Finally, in the Interview, the experts emphasize the importance of recognizing the mentality of the employees in the process. Corporate employees should be informed about the upcoming alliance to enhance acceptance. As with any addition to a household, employees tend to feel threatened by a newcomer, and they often require reassurance and coaching to facilitate the integration process.
At the same time, while being parented, a start-up also needs to be active in the formation of the new relationship with the parent. As Dawn Belt of Fenwick & West pointed out in the Interview, as early as the negotiation phase, a start-up should be aware if the vision and values of the two companies are in alignment, and if a cultural marriage is attainable. While it is easy to get excited about the dollar amount of the M&A, start-ups need to be thoughtful and deliberate about finding a good home. Arnaud Leroi, a partner at Bain & Company, commented that large companies have become more open to accommodate the needs from start-ups. As such, start-ups are encouraged to initiate discussions about the level of post-acquisition autonomy, control over operations as well as the future roles of its key members with the parent. Much like the change management required for large corporations, start-ups need to ensure that they have a strategy that is deliberately planned and implemented.
Generally, it is important for both the parent and the start-up to acknowledge that not everything can be planned out up front and that both sides need to be prepared for some hiccups along the way. As such, it is important for both parties involved in the acquisition to have a strategic plan in place, and approach the transition with a flexible mindset.
The author would like to thank Maha Mansour, articling student, for her assistance in preparing this legal update.
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