M&A in VC: A Path to Successful Exits

“The key to making acquisitions is being ready because you really never know when the right big one is going to come along.”- James McNerney

In May 2020, Verizon (telecommunications company) acquired BlueJeans Network, a video conferencing company, for approximately USD-$-500mm. BlueJeans was founded in 2009 and raised USD-$-175mm in 6 rounds from investors such as ESO fund, Battery Ventures, New Enterprise Associates, among others. In 2020, more than 1,500 M&A transactions were carried out for a value of more than USD-$-149bn. This is an example of one way VC funds can exit from an investment.

Entrepreneurs build a startup not only because of its impact and significance, but also because of the potential economic performance they could obtain. Some of the ways to exit an investment can be an initial public offering (IPO) as well as an acquisition or merger.

There are 3 types of mergers:

  • Horizontal: The acquirer and the acquired company belong to the same industry. For example, Uber’s acquisition of Postmates in June for USD-$-2.65bn.
  • Vertical: The acquired company sells or buys (value chain) in the same industry as the acquirer. For example, Amazon acquired Zoox, an autonomous vehicle company, for USD-$- 1.2bn.
  • Conglomerate: The acquired company and the acquirer are in different industries. For example, in 1999 the now coffee giant Starbucks bought a company in the retail music space for USD-$-10mm.

Mergers can be made by either exchanging shares; or by paying in cash. There is usually a combination of these payment methods.

The reasons for acquiring a company varies, however, they should be strategic and must generate value for both parties. Some of these reasons are as follows:

  • Synergies: The acquisition adds economies of value that result in synergies for the new organization. These synergies can be in sales for example, using the same sales force to sell new products or complementary services. They also result in synergies that help reduce costs.
  • Economies of scale and scope: Economies of scale generate savings from the production of high-volume goods. Economies of scope generate savings by combining marketing and distribution of related products.
  • Vertical integration: It is the merger of two companies in the same industry that manufacture required products at different stages of the production cycle. Its main benefit is coordination saving costs and reducing friction.
  • Experience: It may be more efficient to buy a company for its talent pool that is already a functioning unit.
  • Monopoly profits: Sometimes the combination of two companies generates more profits by capturing a larger market.
  • Efficiency gains: Duplications are eliminated, in addition, there may be improvements due to the mismanagement of any of the 2 organizations.
  • Tax savings for operating losses: When one part has income and the other tax loss, they can be combined resulting in significant tax savings.
  • Diversification: The combination of two companies results in risk reduction. In addition, it can bring an increase in borrowing capacity and improve financial costs. This diversification can also improve the liquidity of the new organization.
  • Earnings growth: It is possible that two companies combined could have higher earnings per share than the pre-merger earnings per share of either company, even if the merger does not generate economic value.
  • Managerial reasons: Sometimes the top management of a company seeks to merge or acquire another to increase its size and with them increase its individual benefits. This can create conflicts of interest. In addition, sometimes the excess of security of the upper management leads them to seek a merger or acquisition under any circumstance.

Independent VC funds, unlike corporate or Family Offices, have an exit period to realize their financial return. Therefore, they will look for an option that suits their interests. Mergers and acquisitions are one of the most efficient ways to carry out an investment exit. Whenever these types of exits are considered, it is important to take into consideration all the options, as well as all the possible buyers and choose the one that results in the highest return.

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Ricardo Latournerie. VC Investor at ACV.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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