Growth By Combination

Spring is a time of new opportunities. A time of reawakening and growth. This year depressed valuations and a challenging financing environment have forced a number of companies to cut back on programs, reduce staffing, or seek creative structures to raise the funds necessary to continue advancing their programs.

I was recently approached by a first time CEO for guidance concerning how to approach a negotiation that had been proposed under which their company would be merged with another company, and an investment bank would assist in raising $X million in new financing for the combined entity.

First and foremost, I think one needs to come up with a compelling story around the combined entity. What big opportunity are they going to pursue together? Why does the combination create a capability that neither company possessed alone? Why are the two companies complementary and stronger as one than as separate partners? This story needs to be developed by the two CEOs together, with input from the banker.

What will the management structure look like? The two CEOs must agree and feel comfortable supporting the new structure going forward. There may be some redundancies in senior staff positions, and these will have to be sorted out in advance.

The two CEOs must also agree on what will be the equity distribution between shareholders of the two entities (and new investors). This implies that they agree on the relative valuation of the three entities (the two original companies and the new money). This is often the most challenging part of the discussion, as both companies will have unique perspectives and rationale to support their positions. Often someone needs to give something in order to reach a compromise that everyone can feel good about going forward - or at least agree is preferable to keeping the two companies separate.

At the same time, they must agree on the key goals they hope to achieve together at least over the first 24 months. They must also be comfortable that the amount of money being raised by the bankers is sufficient to get them through this period, achieve some meaningful value enhancing milestones together, and position them to raise more money (how much?), and to accomplish even more (what major milestones?) following a future financing event.

If the two CEOs can reach agreement on the story, the structure, the goals, and the relative valuation of the entities, then perhaps there is a strong basis for moving forward together.