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So far this year, deal parties are approaching M&A with cautious optimism. This series of Cooley M&A blog posts include some brief observations that offer some M&A highlights over the past year and our thoughts for the year to come.
Innovation Pressures Fuel M&A
The WSJ has written about the rise of acquisitions by “old-line” non-tech companies of tech startups. According to the WSJ, non-tech companies made more than $125 billion worth of tech-related acquisitions in 2016, the most ever, up from $20 billion just five years ago.
That non-tech companies are buying tech and e-commerce start-ups is not new. The exponential rise in the number of deals and deal sizes and the prominence of the non-tech acquirers, however, have captured headlines (e.g. Unilever/Dollar Shave, Wal-Mart/Jet.com). Companies, both old and new, are feeling the pressure to innovate and to keep innovating in the current tech-focused and e-commerce economy.
Serial tech acquirers, who have traditionally grown through tech buys, were relatively less active in the public markets last year. However, we are seeing consistent acquisitions of VC-backed private tech companies – many done with stealth to avoid tipping would-be competitors about product roadmaps and planned innovation – and steady acquisitions of tech talent, which means that some of the most interesting tech deals are not even hitting the wire.
One of the biggest concerns for tech acquirers has been, and continues to be, how to retain tech talent and key employees who are essential to the acquired business’ success. As these deals proliferate, we will see focus on talent retention through equity incentives, such as management rollovers of equity, and equity re-vesting or holdback provisions for founders and other key employees. Careful diligence of a target’s intellectual property and privacy/cybersecurity profile is always important, as well as matters related to the complex waterfall payments associated with the start-up’s capitalization structure. This includes managing board conflicts and structuring management payouts to align with the board’s fiduciary duties to its stockholders.