Late at night on January 26, 2000, Ray, Ron, and myself stepped out of the smaller conference room and headed to the large deal was worth $22m.PCTEL conference room, where the executive team and members of the board were waiting for us. "We will take $20 million in cash and stock based on the 60-day moving average PCTEL stock price" was our final offer. They agreed, and we shook hands. The lawyers started drafting the paperwork. Three months later the deal was signed. Based on the 60-day average stock price and the transaction price, the
Let me rewind a little. Four months earlier, In September 1999, I told Ray and Ron that if we wanted to grow Voyager Technologies further, we had to move it from Morgan Hill, 10 miles south of San Jose, California, to "main street" Silicon Valley, and we needed to raise an investment. Voyager was a 7-person engineering company with annual revenue just shy of one million dollars. They didn't want an investor, and they didn't want to move. I realized that the timing was right (little did I know how right it was just before the dot.com crash the following year), and we had the right product at the right time. The other alternative, I told them, was to sell the company. Somehow they both agreed to sell. Given that I was the minority shareholder and they held the majority, I asked them "how much would you sell it for?" Ron told me that they had an offer for $3m a few months earlier. This sounded just about right for the size of the company and its revenue. "That wasn't a real offer," said Ray. "If it was--I would have sold it for that price." So we've established, Voyager was worth $3m. The agreement we had was that I was going to be the sole negotiator for the company. I led the search of the right acquirer, and used the following 3 rules that led to the closing four months later at a price of $22m.
1. Positioning, Positioning, Positioning.
First of all, you have to remember that what the acquirer is buying is more important than what you are selling. That's the same thing, you might think, but it really isn't. First of all, don't sell the company. At least don't be perceived as such. Look for partners that can take what you have and make much more of it. Voyager had technology. PCTEL had customers, channels, market, and resources. 1+1=7. Voyager was one of the earlier companies with Spread Spectrum radio technology and engineering capabilities in the late 1990s. Who cares? You might ask. Well, there were two very little known emerging wireless standards that were released that year using exactly that technology. Bluetooth and 802.11b (later to be known as--Wi-Fi...) If we were offering the technology and engineering skills, we wouldn't have reached far. However, I positioned it as the fundamental technology for Bluetooth and Wi-Fi. That's what PCTEL really wanted to buy. And they eventually did.
2. Be ready to sell.
The longer the selling process, the lower the probability that the deal would ever close. Reaching an agreeable term-sheet is relatively quick and easy. Drafting the legal paperwork doesn't take too long either. The due-diligence process, in which the acquiring company dissects every element of your business to see that they are buying what you said they were takes the longest. However, the questions to be answered in this process are fairly common and predictable. So, ahead of the process, I created a binder with all that pertinent information. Some required me to use Voyager's external counsels and accountants, but at the end I had a complete binder. After we agreed on the term-sheet, the designated PCTEL negotiator gave me a list of information they need from us for the due-diligence process. I gave him the binder, and asked him to look inside, and tell me what else he needed. Two days later he called me and asked for two more things. It took me less than a week to get those. The due-diligence was done.
3. Hide successes. Even the big ones.
The term-sheet is not very specific. The acquisition price is typically presented as a range. In our case, the range was 15 to 20 million dollars. Even the low end of that range was 5 times more than what Ray and Ron expected. Towards the end of the short due-diligence process, the PCTEL negotiator told me that the board had asked him to lower the range to 12-18 million. I asked him if, instead, his board would be willing to consider widening the range to 12-20. This way they could still have the low end of the range ($12m), while we could still keep the high end ($20m). They agreed. They were buying the technology and skills we had. But I had two deals going that I didn't tell them about. One of them was a deal with Panasonic for a project and technology licensing for the use in multi-handset cordless telephones. This was a $2+ million deal. I didn't tell PCTEL that the deal was closed already. I wasn't hiding information that would lower the valuation. I held back information that would raise it. That night in January, right before we shook hands on the deal, when we had to narrow the 12-20 range to a single number, I showed them that the Panasonic deal was inked, and the down-payment, very close to Voyager's annual revenue at that time, was already in the bank. This "surprise" allowed us to close the deal at the high end of the range (20 million), and attaching it to the 60-day moving average stock price ($56) while that stock price that day was $62 made it a 22 million dollar deal.
You may think that the rules above would have applied only during those exuberant times right before the dot.com bust. Recent acquisitions and acquisition prices would prove the opposite. These rules are as valid today as they were then.
(Note: more about the due-diligence process and the documents required for it can be found in Lesson 31 of my online class: Business Plan through investor eyes).