Why M&A is the Preferred Exit Option for Technology Companies

An Interview with Harald Maehrle, Mummert & Company – Part I

Back in March, I participated in the 8th Technology Day, the annual conference for innovation and corporate financing in Munich, organized by Mummert & Company in cooperation with the Munich Network. That’s where I met Harald Maehrle, partner at Mummert & Company, a leading corporate finance consultancy firm headquartered in Munich. Mr. Maehrle presented a great overview on the exit options for European technology companies.

Harald Maehrle, Managing Partner, Mummert & Company

Harald Maehrle

A very interesting topic indeed, and so I thank Mr. Maehrle for sitting down with me for an interview to share his perspective on the exit situation in the European technology sector, and what companies can do to prepare for an M&A deal.

This is the first part of our interview – focusing on exit options for European technology companies.

Barbara Hoisl: Mr. Maehrle, Mummert & Company is a leading international corporate finance consultancy. What does corporate finance consulting mean?

Harald Maehrle:  Corporate finance consulting supports companies and owners in two types of situations: M&A, i.e. acquiring or selling a company, and capital-related transactions, such as raising equity funding, debt capital, or hybrid financing. For us, M&A deals represent more than two thirds of our business overall, and in the technology sector it is nearly exclusively M&A.

Q: So, why should technology companies engage a corporate finance consultancy for doing an M&A deal? Why can’t they do that on their own?

Harald Maehrle: I’m convinced that founders looking to sell their company should absolutely involve a corporate finance consultancy – since a founder has learned how to lead a company, but has never learned how to sell it. Many people think that selling a company is a fast and straightforward process, similar to selling a home. But that’s far from the truth: selling a company requires the orchestration of multiple, complex work streams, including strategic considerations, valuation of the company, tax and legal implications, and not to forget the negotiation process itself. A typical M&A deal takes six to nine months from beginning to close, and company leaders usually have neither the required bandwidth nor the necessary skills to lead this process on their own.

And there’s the important aspect of being able to take a hard negotiation stance, if required. Although I’m an investment banker by training, whenever I had to sell a company that I founded or co-founded, even I did not negotiate my own M&A deals – because I did not want to negotiate the deal with my future manager. Founders that sell their company are typically required to stay with the acquiring company for a certain period of time to ensure a smooth transition. And this means that they will work for the key person that drove the M&A deal on the other side of the table.

Therefore, experience is crucial. If I were to sell my company, I would not entrust it to someone with less than 10 years of experience in the M&A business.

Q: At the technology day, you talked about how M&A deals are the main exit path for technology companies today. Can you share a little bit more on that?

Harald Maehrle: Well, first it depends on what you mean by “exit”. To me, exit means selling at least the majority of a company’s shares, typically all of the shares. In that sense, an IPO is a partial exit at best, since a company led by its founders is not allowed to place all of its shares in an IPO. An IPO is a vehicle for raising additional capital to finance the company, not a vehicle for returning money to the owners. So even if an IPO were a viable option from a market perspective, which it isn’t for most companies, an M&A deal is the only option for a full exit that immediately returns money to the owners. That’s why M&A deals are so important.

Q: Who are possible buyers for technology companies?

Harald Maehrle: We typically see two types of buyers: strategic buyers on one hand, and financial investors on the other hand.

(Note by Barbara Hoisl: strategic buyers are companies that acquire another business because they expect synergies with their existing business. see Investopedia)

Among financial investors, we further distinguish between institutional investors, primarily private equity funds and family offices, and, to a lesser extent, individual investors. Family offices have become increasingly important over the last twenty years: they operate similar to private equity funds, but invest the capital of one or several families only.

Globally, we see a trend over the last few decades that financial investors have become a very important exit channel. More than half of the M&A deals done by consultancies like us are done with financial investors.

The reason for the rising importance of financial investors is clear: when they engage in a given industry, they are looking for growth, and growing organically at market rates is often not enough. In that case, M&A deals are utilized to accelerate growth, often in the context of a “buy-and-build strategy”. This strategy involves buying a platform company, plus additional companies that complement the platform. In this way, investors create a larger entity that often can achieve a higher valuation than the sum of the parts valuations.

Well-publicized recent transactions by financial investors are the acquisition of cloud automation company UC4 by private equity fund EQT VI in August 2012 and the acquisition of Tieto Germany by Aurelius AG in January 2013.

Q: Mummert & Company is headquartered in Munich. Do you frequently see deals that happen internationally?

Harald Maehrle: Absolutely. The M&A business is very international – at least 80 %, probably over 90% of the transactions we do are international, with buyers frequently headquartered in the US. Therefore, it’s important to use an M&A advisor who has a proven track record in negotiating international deals.

It’s not only about the language and preparing all the documents in English. Much more important is the ability to negotiate in different cultural contexts. How you drive negotiations and make a deal attractive to a US buyer is very different to how you’d do it for a buyer from the German mittelstand. It’s not that one approach or culture is better or easier than the other, it’s just different.

Barbara Hoisl: Thank you very much, and that’s a great bridge to the second part of our interview, where we will focus on the stages of the M&A process and what a company’s leaders can do to prepare for selling their company. Stay tuned!

Mummert & Company is a leading international corporate finance advisory with offices in Munich (Germany), Vienna (Austria), London (UK) and Princeton (USA).
www.mummertcompany.com
Managing partner Harald Maehrle can be reached at maehrle@mummertcompany.com.

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