EXIT STRATEGIES: Threats and opportunities

Example:

In 1984 Pioneer Computer Group (PCS) utilised a 4th generation language from North County Computer Services (NCCS) in Escondido, California. At the time the language, USER11, ran on the RESTS/E operating system on the Digital Equipment Corporation’s PDP 11/70. With the introduction of the VAX series of computers, the USER 11 product was ported over to the VAX to provide an identical programming and end user environment. However, this failed to use any of the new features inherent in the VAX and thus PCS faced a decline in its market acceptance. NCCS were determined to stay with a transparent interface thus threatening the survival of the PCS applications written in USER 11. To solve the problem PCS raised $1.5 million in venture capital, acquired NCCS and rewrote the USER 11 product to utilise the advanced features of the VAX.

Source: Dr. Tom McKaskill, Former CEO, Pioneer Computer Systems

Agere Systems acquired Massana rather than let their initial investment be lost.

Example:

Agere Systems announced Monday the acquisition of an Irish semiconductor-maker that designs broadband network chips that are 10 times faster than current technology.
The startup has only produced a prototype, which several companies are sampling, including possibly Cisco Systems and Apple. The privately held company has not turned a profit. It has received about $30 million from U.S. and overseas venture capital firms. Agere will have to inject cash to cover research and employee salaries, without revenue coming in immediately. It will assume a small amount of debt.

The Dublin company is a start-up venture founded in 1996 that began as a provider of engineering services. It has collaborated with Agere for the last year on developing gigabit Ethernet chips used in high-speed broadband networks. Agere produces chips for slower speed Ethernet connections. Massana was on track to fulfill its contract, but Agere decided it wanted more control over the project so it decided to buy the company, said Sohail Khan, executive vice president of Agere’s Infrastructure Systems.

Source: https://www.mcall.com/business/ accessed 7th September 2003

Chinadotcom acquired Ross Systems Inc., a supplier of ERP systems. Ross Systems had a history of poor management which made them vulnerable to takeover. Chinadotcom may have decided to acquire rather than let them pass into a competitor’s hands.

Example:

ATLANTA (Dow Jones)–Chinadotcom Corp.’s CDC Software unit signed a definitive agreement to acquire Ross Systems Inc. (NasdaqNM:ROSS- NEWS) for $5 in cash and $14 worth of chinadotcom common shares. In addition, CDC Software has been a master distributor of Ross Systems’ enterprise business solution, iRenaissance suite, in the Greater China region.

Source: https://www.rosssystems.com/ accessed 6th September 2003

Peoplesoft acquired Distinction Software as a counter to the announcement by SAP of a suite of supply chain optimization products.

Example:

In early 1998 SAP announced a suite of supply chain optimization products replacing their alliances with a number of small software companies. Within a few months their major competitors including Peoplesoft, J D Edwards, Oracle and Baan all made similar announcements. However, these were mostly development initiatives and not completed products. Peoplesoft took the opportunity in late 1998 to acquire a small software house, Distinction Software Inc. which had a complete suite of products in order to counter the move by SAP.

Source: Dr. Tom McKaskill, former CEO, Distinction Software Inc.

Solving a serious problem, negating a threat, overcoming an obstacle or removing a constraint are ways in which the selling firm can offer strategic value to the acquirer. The buyer needs to see value beyond that which is represented by the earnings on the seller’s income statement. It is by creating this additional or ‘strategic’ value that the seller can achieve a premium on the sale of the business.

Most business owners know their industry and understand their own assets and capabilities. We can think of these as ‘things we own’ and ‘things we do’. The process of seeking out strategic buyers based on solving a problem is to think of how other businesses would use the assets or capabilities of the firm. Those businesses which could use these assets or capabilities to overcome a problem or threat are target acquirers.

Example:

In 1990 the owners of Pioneer Computer Group (PCG) decided to sell their software firm. They had 160 staff over three locations; Northampton and London in England and San Diego in California. They developed 4th generation languages for the PDP/11 and VAX computers and then used these languages to develop ERP systems for discrete and process manufactures. After investigating the UK for potential buyers, they were disappointed in the low valuations and turned their attention to the USA.

There they found Ross Systems Inc. that was also using the VAX computer but using a 3rd generation language and only selling corporate financial systems. Ross recognized that their future looked bleak unless they could compete with new software technology and gain access to a larger market. PCG’s successful approach to Ross was to show how they could provide ROSS with a new development capability and enable them to enter a growth market in the manufacturing sector. The sale was 200% higher than the valuation they could have achieved in the UK.

Source: Dr. Tom McKaskill, former CEO, Pioneer Computer Group

Finding the strategic buyer with a threat or problem your business can solve can take some time. The buyer must have both the need and the capability to buy. In the ‘problem solving’ scenario, it requires a search for corporations which need what the firm has which could overcome a problem or threat, however, few corporations publicize their threats. A well networked industry executive may be able to spot opportunities but generally it requires a systematic approach to cultivating relationships where such situations are discussed. Sometimes it just requires boldness to initiate discussions with industry firms to discover where a strategic fit might occur. Generally it is only by participating in industry and professional networks that a firm will find out about a corporation with a problem which they can eliminate or reduce. Professional services firms are often tasked with finding an acquisition in these situation, thus being known to such firms can assist in creating this type of strategic exit.