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the netpreneur's perspective on the

anatomy of an acquisition

 "You will always sell your business," according to Mario Morino, whether acquired by another company, VC money or an IPO.  Bill Gates sold in some way, so did Steve Case, Larry Ellison and just about every other successful entrepreneur.  According to Morino, "You should be thinking about that all the time so when the day comes you will be prepared for it."  At this Coffee & DoughNets meeting held February 24, 2000, a panel of entrepreneurs who recently sold their companies joined Morino and M&A expert Alexandra Lajoux to talk about the process from the inside, including not just the business issues, but the human and emotional ones as well.

Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, or any of their affiliates, agents, officers or directors. The archive pages are provided "as is" and your use is at your own risk.  

Copyright 2000, Morino Institute. All rights reserved. Edited for length and clarity.




Dheeraj (Raj) Khera, Co-founder of GovCon
Oron Strauss, Co-founder of Net.Capitol
Frank Wood, Co-founder of ToFish!

Mario Morino, Chairman, Morino Institute

Alexandra Reed Lajoux, National Association of Corporate Directors

fran witzel: introduction

Good morning.  I'm Fran Witzel, Vice President of the Morino Institute's, the .org community for .com startups.  It is my great pleasure to welcome you this morning to our Coffee & DoughNets event.

          Today we are going to discuss the Anatomy of an Acquisition from the netpreneur's perspective.  Despite IPO fever, getting acquired by another company is still the more common exit for high growth netpreneurs by far.  We are fortunate to have with us this morning a noted author and expert in the field of mergers and acquisitions (M&A) to introduce both our topic and our panel of netpreneurs who will share their experiences in selling their companies.  We will then open up a question and answer session, followed by a wrap-up by Mario Morino, a man who has been on both sides of the acquisition transaction.

          I now want to introduce Alexandra Lajoux, Director of Research at the National Association of Corporate Directors, Editor In Chief of Director's Monthly and author of several books about M&A, including The Art Of M&A Integration, The Art Of M&A Financing & Refinancing and The Art Of M&A Due Diligence.  Her true passion, right now, however, is a chorus that she has organized at her son's middle school in South Arlington.  The group's theme song is "I Believe I Can Fly," and that is her theme this morning.


alexandra lajoux: i believe i can fly

Ms. Lajoux:  Thank you, Fran.  Good morning, everyone.  It is truly an honor to be here. I consider this to be a living, breathing emblem, personification and embodiment of all that really makes this country great.  Here you are to teach one another, to learn from one another about your field—.com companies obtaining capital in order to fly, and possibly buying other companies or selling your own down the line.  I'm very enthusiastic about this.

          I started out in the M&A business when I was 15, clipping newspapers for my dad who started a publication called Mergers and Acquisitions, which still exists today.  While I won't promote my own books, I will say that this publication, long since acquired, has excellent information about trends, and it has a lot of good news for you.  It tells us, for example, that in recent years the amount of money spent on companies like yours has gone up to $15 billion.  Every year a few hundred, sometimes 400 and up to 500 companies like yours in the information and computer industries will sell at good prices.

          The average price is about $300 million for companies like yours; the median is smaller, about $35 million.  That means half of the deals done are above $35 million; the other half below.  That is true of all deals in general, and it is one of my points. In the public perception, M&A is about two very large, equal companies coming together and finding synergies by reducing costs and cutting manpower.  It is seen as a greedy, Wall Street phenomenon that reduces jobs in our society and reduces the livelihoods of families.  In fact, that is far from true.  M&A is the ultimate exit for entrepreneurs like you who have the vision to pursue a dream, but who do not necessarily want to keep a company your whole life.

          We have a vital, vibrant M&A market with some 10,000 deals every year—and that is only counting deals valued at $5 million and up.  Also, there are several hundred funds, commercial banks, investment banks and other sources of capital looking for companies just like yours, and you can find their names and addresses in the book, The Directory of Buyout Finance Sources, published by Securities Data.


          It reminds me of a statement that Peter Drucker made years ago about M&A.  Why M&A?  There are many lists that give you all kind of motivations, but Drucker said that it's a choice: do you want money or do you want assets?  If you want assets, you put your money in M&A.  That's why it will always be with us.  People are looking for assets, and there are always people wanting to buy rather than build.

          I think it's about time for me to turn to the real experts.  I'm just a derivative person quoting and describing people like those on our panel, starting with Raj Khera, co-founder and CEO of Khera Communications, and two popular portal sites, for small business, and GovCon, a company he recently sold to VerticalNet.

raj khera: find the honey

I wish that you were going first, Mario, because I learned a lot from you.  If you spoke first, I would follow with "What he said."

          At one of the very first events, Mario talked about The Dangers of Ego And Greed.  That was crucial to us selling GovCon.  I didn't own the whole company.  I owned a portion of it and got diluted because we had to bring other people on board.  If we hadn't brought them on, however, and taken that dilution, we would never have sold the company for what we did.

          GovCon changed an industry.  It changed the way government contractors found bidding opportunities, market research, regulations and other information.  We were the first Web site to put the Commerce Business Daily online, the government publication that has bidding opportunities in it.  We put it online and made it available to people free.  When you put something like that online, we call it "the honey."  It's something people go to see every single day, a reason they want to come back to the site.  It was our stickiness factor.  The fact that we did it first was very important because when you are the first to market, you have established a name for yourself.


          What did we have that someone wanted to buy, rather than spending the money to build it themselves?  It may be cheaper to build something yourself, but how far along will you be if you buy something rather than build it?  We are pretty confident that one of the reasons VerticalNet acquired GovCon was that we had the number one position in the government contractor marketplace. If you went to a government contracting conference or if you talked to other government contractors, everybody knew who GovCon was.  That was an important factor.  Outside the industry, not many people knew who we were, but that didn't matter because people did know us in our particular niche.

          The brand name was very important, and so was the user base which we had built to over 100,000 registered users.  We had demographic information on them and we had an email list that was absolutely phenomenal.  People wanted to rent or buy our list, but we had a strict policy against that.  It's actually what maintained our customer loyalty.

          So what could VerticalNet do?  They could replicate all of GovCon—the data was available—they could go find people to build a similar site, but they wouldn’t be able to capture that user base or the brand name in such a quick period of time. They made the decision that it was cheaper to just give us money or, in our case, stock, for what we had built.  They can increase their page views and use or sell GovCon’s info across other VerticalNet communities.  It is a very good fit for them, and that was one of the reasons they were interested in buying us.

          Why did we want to sell rather than take the company public or wait it out and maybe sell for more?  It goes to another thing Mario said a long time ago, that the company you are working on now may not be the last one you start or the one you continue with.


          We built GovCon, and my experience was paid for by the dilution that I suffered.  I had to get that somewhere.  I couldn't just go out and start a company and sell it for billions of dollars.  I didn't have that experience, but I'm acquiring it and, someday, I hope to do something like that.  However, you also need some financial security, and that was one of our motivating factors.  Another was that we did some due diligence on VerticalNet and figured that their stock was getting ready to go through the roof.  It did, after we sold, and we were very happy about that.

          You need to do your homework on the company that may be interested in you.  If the company you are thinking of selling to is stagnant, or even going downward, be very careful.  Don't sell; walk away from the table.

          I can talk about how we got acquired, but not about the terms of the deal.  The folks at VerticalNet were tough negotiators.  We sat at the table and went through the whole discussion about, "Okay, what are you worth?"  They threw out a number, and we thought, "Oh, my gosh!  Is that all they think we're worth?"  We were so stone faced that they just looked at us and said, "What?  You ready to throw tomatoes at us or something?"  We went back and forth, and we didn't think the deal was going to happen.  This was around October of last year.  On the drive back from Philadelphia with three of the partners in the car, we were just going at each other: "You should have said that.  You should have done this."  We decided never to go camping together after that, and we arrived home thinking the deal wasn't going to happen—we wouldn’t let it happen at the price they quoted.


          A couple of days later they sent us an email saying, "Well, okay, the highest we can go is this."  It was a little bit higher, but we had something bigger in mind.  We went back and forth and back and forth, and then they came back to us and said, "Okay, this is about as far as we can go. We don't have much more negotiating room."  We asked, "What do you mean by not much more'?"  They said. "We have this much wiggle room."  We thought to ourselves, "All right, if they have this much room, let's try to shoot for something just a little higher." That’s the way you negotiate these things.

          One of the most important things I learned came from one of my mentors and partner was to start high because you can always go lower, but you can't go higher.  That's what we did.  I think my partner actually started really high, and that is one of the reasons we were fighting in the car on the drive back home, but it worked out.

          A couple of other quick lessons learned before I turn it over to Oron. One, they will be tough negotiators so be prepared for that, and be prepared to walk away.

          Two, as you build your business, one of the most important things I can tell you is that if you don't have the best performing people, you have to terminate them.  That is one of the things that prevented us from growing as fast as we could have.  We had a few folks on board whom we had to let go, and I just couldn't do it.  Too much of a nice guy, trying to make it work out.  It wasn't working out.  Finally, they left.  We brought in some other people, had the dilution and then everything turned out well.

          The last thing I want to say is that I had no idea how emotional this experience was going to be. GovCon was something my brother, Vivek, and I started in a basement.  It started as a Pentium 66 connected to a 28K modem.  It was one of those homegrown stories.  When you have something like that, when you go through all the ups and downs, you know the nuances of your business inside and out.  You have been working on it for years and someone wants to acquire it, yes, yes, we're all happy.  But you start to get so emotional.  I had no idea how emotional it would be, so be prepared for that, too.

Ms. Lajoux:  Thank you, Raj.  Now let me introduce Oron Strauss.  At 27 years old, he is already a successful entrepreneur.  In April 1996, Oron co-founded Net.Capitol, Inc., a provider of Internet-based products and services for public affairs and political organizations.  Net.Capitol was acquired by in December of 1999, and Oron is now President and CEO of Netivation's Public Policy and Politics Division.


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