The Delta Between a Startup’s General Value and the Value to a Strategic Acquirer

Last week I was talking to a gentleman that previously ran corporate development for a large tech company. During his tenure, the firm acquired dozens of companies and spent billions of dollars on acquisitions. After talking about a few experiences, he explained one of the things people have the hardest time understanding: why strategic acquirers buy companies for much more than what it seems like a company is worth.

Actually, the answer is very simple, especially when the company being acquired has a real business with customers and revenues. The delta between a startup’s perceived value and the value to a strategic acquirer comes down to distribution. In a word, sales. Large tech companies have massive sales teams and partner channels whereby they can add new products and significantly grow product revenue.

Imagine a software or hardware company doing $20 million in revenue with 50 sales reps and 10 channel partners. Depending on the overall economy, size of the market, growth rate, gross margins, etc, the company might be worth 3-10x revenue. Now, an acquirer comes along and sees the startup as strategic. The acquirer has 10,000 sales reps and 10,000 channel partners. Instead of the startup being worth ~$100 million, to the strategic, based on a model that shows the the product doing ~$100 million in sales in 24 months, the startup might be worth $400 million. That’s a big delta between a $100 million valuation in the general market vs $400 million for a strategic acquirer.

The next time you see a big valuation multiple for an acquisition, ask yourself how much faster revenue will grow under the new owner, and how that changes the value equation.

What else? What are some more thoughts on the delta between a startup’s general value and the value to a strategic acquirer?

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