MBA Mondays - Business 101 for startups by Fred Wilson

M & A Issues - The Integration Plan

For the past month we've been doing M&A Case Studies on MBA Mondays. It's time to go back to the basics of M&A. For the next few weeks, I am going to discuss each of the key issues in detail. First up is the integration plan.

The integration plan is the way the buyer plans to operate your business post acquisition. You should get this figured out before you sign the Purchase Agreement. You are going to have to live with the results of the integration and you had better buy into it before you sign your company away to someone else.

There are two primary ways a buyer can "integrate" an acquisition. The first way is they mostly leave your company alone. Examples of this are Google's acquisition of YouTube, eBay's acquisition of Skype, and The Washington Post Company's acquisition of Kaplan (one of my favorite M&A cases). The second way is they totally integrate the company into their organization so you cannot see the former company anymore. Examples of this are Google's acquisition of Applied Semantics, Yahoo's acquisition of Rocketmail, and AOL's acquisition of our former portfolio company TACODA.

And, of course, there are many variations along the spectrum between "leave it alone" and "totally subsume it." In my opinion, consumer facing web services should largely be left alone in an integration. On the other hand, infrastructure, like Doubclick's ad serving platform, is best tightly integrated.

The other critical piece of an integration plan is what happens to the key people. Do they stay with the business? Do they stay with the buyer but focus on something new? Do they parachute out at the signing of the transaction?

I believe the buyer needs to keep the key people in an acquisition. Otherwise, why are you buying the company? So letting the key people parachute out at the signing seems like a really bad idea. That said, the buyer also needs to recognize that great entrepreneurs will not be happy in a big company for long. So most M&A deals include a one or two year stay package for the founder/founding team. That makes sense. That gives the buyer time to put a new team in place before the founding team leaves.

Generally speaking, I think it is a good idea for the key people to stay with the business post acquisition. This provides continuity and comfort in a tumultuous time for the company. However, I have seen situations where the key people went to other parts of the organization and provided value. Dick Costolo left Feedburner post acquisition by Google and focused on other key issues inside Google. Dave Morgan left TACODA and focused on strategic issues for AOL post the TACODA acquisition. This can work if there is a strong management team left in the acquired business post transaction.

Another key issue is how to manage conflicts between the acquired company and existing efforts inside the buyer's organization. This happened in Yahoo's acquisition of Delcious. Yahoo had a competing effort underway and they left it in place after acquiring Delicious. This resulted in a number of difficult product decisions and competing resources and a host of other issues. I think it was one of many reasons Delicious did not fare well under Yahoo's ownership. You have the most leverage before you sign the Purchase Agreement so if you want the buyer to kill off competing projects, get that agreeed to before you sell. You may not be able to get it done after you sell.

These are some of the big issues you will face in an integration. There are plenty more. But this is a blog post and I like to keep them reasonably short. Take this part of the deal negotiation very seriously. Many entrepreneurs focus on the price and terms and don't worry too much about what happens post closing. But then they regret it because they have to work in a bad situation for two years and worse they witness the company and team they built withering away inside the buyer's organization and are powerless to do anything about it. It is a faustian bargain in many ways. But you don't have to let it be that way. Get the integration plan right and you can have your cake and eat it too.