Have you ever wondered why some mergers and acquisitions (M&A) deals seem to drag on forever, only to crumble at the eleventh hour? This question has become all the more pertinent in the current business climate, impacting startups and large corporations alike. The once straightforward path to joining forces or acquiring new ventures has turned into a thorny journey, fraught with regulatory hurdles and market volatility.
In the high-profile case of Adobe’s attempted acquisition of Figma, we witnessed a 15-month saga from the announcement of the definitive agreement to the deal’s ultimate termination. This prolonged period signifies a broader trend of drawn-out merger processes that strain private companies, leaving them in a state of limbo that complicates recruiting and sales, and burdens company boards with additional regulatory work.
General partner at Theory Ventures, Tomasz Tunguz, who has experienced the M&A process firsthand, remarked on the challenges companies face during such uncertain times. He cited his involvement with Kustomer and Looker, both of which were acquired by tech giants, as examples of the toll that the prolonged process can take on a company’s operations.
The situation that Figma found itself in, as co-founder and CEO Dylan Field shared, was a testament to the strain an extended M&A process can impose. Despite a proposed $20 billion deal in cash and stock from Adobe, regulatory challenges led to a mutual decision to call it off. Adobe and Figma’s painstaking efforts to convince regulators of the merits of their merger failed to clear the roadblocks, reflecting a new reality where deals are less likely to close, even with signed term sheets.
Notably, Aly Love Simons, a corporate partner at the law firm Debevoise & Plimpton, pointed out that today’s environment offers only a 50-60% chance of moving from a term sheet to a definitive agreement, and then an 85% chance that the deal will close. This uncertainty has forced venture-backed companies and their CEOs to adapt their culture, including shifting towards greater confidentiality and altering office layouts to preserve sensitive discussions.
Simons highlighted the importance for companies to consider the time and financial resources required to undergo the M&A process, including the distractions it causes for management and employees. Although acquisitions have become more cumbersome, the market forces many boards to explore these options, especially in light of declining startup valuations and a challenging venture fundraising market.
When a deal falls through, the emotional and financial impacts are significant. Employees lose expected payouts, venture investors need to adjust their holdings, and management must find ways to reinvigorate the business. Tunguz suggested that one way forward could be for a company like Figma to make its own acquisition, signaling a new direction to the market. With a $1 billion termination fee from Adobe, Figma has an opportunity to rebound and redefine its strategy.
This narrative isn’t just about numbers and negotiations; it’s about the people and innovation behind the startups that are navigating unfamiliar waters. As these companies work to find their footing following failed M&A attempts, they confront a landscape that is constantly evolving and ever more challenging.
We would love to hear your thoughts on this issue. Have you experienced the complexities of the M&A process, or do you foresee the current trends affecting your business decisions? Share your insights and join the conversation.
In conclusion, while M&As are essential for business growth and innovation, the recent increase in deal durations and failures poses significant challenges for startups. It’s crucial for these companies and their stakeholders to prepare for the complex and uncertain road ahead. Stay informed, stay flexible, and keep an eye on the evolving market dynamics to navigate these turbulent times successfully.
FAQs:
What are the main reasons behind the increased duration and failure of M&A deals? The main reasons include heightened regulatory scrutiny, more extensive due diligence by buyers, difficulties in securing debt financing, and market volatility affecting startup valuations.
How does the prolonged M&A process affect startups? It creates uncertainty and strain, complicating recruiting and sales, consuming significant board time with regulatory responses and integration issues, and necessitating cultural changes for confidentiality.
What can startups do to mitigate the impact of a prolonged M&A process? Startups need to plan for the time and financial resources required, manage distractions, and potentially explore alternative strategies, such as making their own acquisitions or pivoting their business direction.
What happens to a startup when a deal falls apart? There can be emotional and financial losses for employees and investors, and the management team must work to reinvigorate the business, often by rethinking strategy and operations.
How can startups remain resilient in the face of these M&A challenges? By staying informed about market trends, maintaining flexibility in strategy, being prepared for the complex M&A process, and seeking opportunities to innovate and grow independently.
Our Recommendations:
As the landscape of mergers and acquisitions evolves, startups find themselves navigating a more challenging path toward growth and success. Here at Best Small Venture, we recommend that startups stay agile, seek diverse advice from experienced professionals, and consider strategic alternatives to traditional M&A. By doing so, they can maintain momentum in an unpredictable market and continue to thrive.
What’s your take on this? Let’s know about your thoughts in the comments below!
