This has been a busy fall shopping season in the worlds of tech and biotech: A quick tally rings up more than $7 billion worth of deals since summer came to a close.
The acquirees have included several startups that make technology to deliver digital advertising; one that is developing drugs to treat diseases that cause fibrosis, or tissue-scarring; and two similarly named companies that offer cybersecurity and data storage services: Carbon Black and Carbonite, which were both publicly traded.
But acquisitions are a bit like shooting stars: A press release crosses the wires, a few small news items show up in blogs and newspapers, and they quickly vanish from view. How do you actually understand what happened, especially if dollar amounts aren’t divulged? Was this a good outcome, just OK, or a fire sale?
It’s often not so easy to answer those questions based on what’s disclosed publicly. But here’s a quick guide to acquisitions — and why we are likely to see more of them in the first half of 2020.
Who’s the buyer?
When a big company buys a startup, it is usually described by insiders as a “strategic buyer” — it’s trying to get something that will help grow its business. That was the case when Roku, which makes streaming television devices, bought Boston-based DataXu, which helps manage digital advertising, last month.
Sometimes, private equity investment firms buy startups in the hopes they can retool them, bring in some new executives, and get them in better shape to sell to someone else for a profit.
Doug Brockway, a managing director at the investment bank Stephens, says he has never seen private equity firms “be as active in tech and software as they are today.” And, he adds, “historically, you’d never find a PE paying more than a strategic buyer, and in the past couple years we’ve seen examples of that.”
Then there are cases in which one privately held startup acquires another. The latter company is often getting stock in the former — which means it has to hold on and hope the purchaser will eventually go public or get acquired. Some investors quip that those deals can be like “tying two rocks together,” or merging two companies that don’t have much momentum and hoping that something good will come of it.
Some deals include an upfront purchase amount, paid in cash or company stock, and contingent payments based on future achievements — such as getting a new medical device approved by the Food and Drug Administration. That was the case this month when California-based Daré Bioscience bought Microchips Biotech, of Lexington. The upfront amount was just $2.3 million in stock, but the deal could be worth another $101 million if Microchips hits various targets in the coming years. (Unfortunately, the company, which designs implantable systems for delivering medications, has raised about $75 million over the course of its 20-year lifespan — so this one is not exactly a bell-ringer.)
When the price tag isn’t announced
In many cases, if the price of an acquisition isn’t announced, “the number isn’t very big,” says Todd Dagres, a cofounder of the Boston venture capital firm Spark Capital. “Often, the sellers don’t want the price to be public because they aren’t crazy about it.” And the venture capitalists, founders, and employees aren’t being rewarded especially well.
But in some cases, says Ben Howe, CEO of the Boston investment bank AGC Partners, there are no numbers tied to the deal publicly “because the buyer doesn’t want to be embarrassed by the high revenue multiple they’ve paid,” meaning they’re paying a lot for a promising young company that isn’t generating all that much revenue. Wall Street can frown on that.
Jeff Fagnan, of the Boston venture capital firm Accomplice, says his firm has “had really good, multibillion-dollar exits where we were not allowed to disclose the price, terms, or anything.” (“Exit” is term used for an acquisition or initial public offering.) But, Fagnan says, “the big numbers eventually get out, because of human nature. Somebody will leak it.”
Leaked info can be a bit braggy, however. When Amazon bought PillPack, a Somerville startup that operates an online pharmacy, in June, the price tag mentioned in many news accounts was $1 billion. But when Amazon actually revealed the figure in a financial filing, it was a fair bit lower: $753 million.
Bottom line: If the price isn’t being announced, it’s extremely difficult to tell who’s making out well.
What happens after the purchase
A purchaser can leave the company, its product, and its employees largely alone and let them keep building the business. It can also shut down the office, let most of the employees go, and integrate the product into its own catalog. Or it can do something in between. But you usually can’t tell which scenario is playing out for a year or more — even if you work for the acquired company.
“We tell founders and executives that when you sell, you’re losing control,” Fagnan says. Negotiate for a price that makes you happy, he says, because once the deal is done, everything “is all outside your control. They can shut down the office, shut down the product, change peoples’ jobs, and you don’t control any of that.”
(My favorite story about what can happen to a startup after an acquisition involves Oracle Corp. and a company’s pet pufferfish.)
Sell now, or wait until 2021?
With unemployment low and stock market indexes high, “it feels like it is a safe environment” for sellers to get a fair market value for their companies, Howe says, “for a couple quarters, if not years.” But there’s an undercurrent of fear, he adds, that “an eventual downturn or the elections next year will cause a negative business climate, and when you talk to people, they say they want to get ahead of that.”
What impact could the 2020 election cycle have on stock markets and the potential buyers of fledgling companies? Tough to know, but there’s a sense that things could get “a little quieter,” Brockway says, as “people are trying to figure out which way the elections will go” and what the implications may be for business.
Any acquisition deal, Brockway observes, usually takes about six months, from initial discussions to closing. As a result, “if you want to get something done in 2020, you should probably get going sooner rather than later,” he says. The alternative: Hang tight until 2021.
Scott Kirsner can be reached at firstname.lastname@example.org.