
The M&A Process Is Broken - zuhayeer
https://www.atlassian.com/blog/technology/atlassian-term-sheet
======
Negitivefrags
Ha.

This is the least of how M&A is broken.

The entire industry around M&A exists to play on one emotion in its clients.
Fear.

Fear will be stoked in you from the first meeting with any advisors. All of
the people who are supposedly on your side know, the more afraid the customer
is, the higher percentage of the deal price they can extract.

Fear that you could have negotiated a higher price, fear that you are going to
lose the deal, fear that you will agree to a term that will screw you in the
long term.

Once you are sufficiently afraid, you will then not bat an eye about spending
literally millions of dollars for the mundane services they provide and
feeling good about it.

~~~
lttlrck
Sound a lot like real estate agents.

~~~
froindt
There was just some discussion about this on /r/RealEstate. Apparently a 60
hour class and a multiple choice exam are all that's between you and a real
estate license. I had no idea the threshold was so low.

~~~
nradov
Any fool can get a real estate license. The hard parts are joining a brokerage
(owners usually don't want to take on random new agents) and then finding
clients. In California the majority of license holders did zero transactions
last year.

~~~
mlacks
Here in Hawaii at least, the hiring process is actually reversed from most
careers. You pay a variety of fees just to park your license there - wether or
not you actually complete a transaction. Most brokerages will hire anyone so
long as they aren’t actively damaging the reputation of the firm.

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RcouF1uZ4gsC
>Large tech companies exert negotiating power over founders and selling
companies because they can, and stack the deck in their favor with buyer-
favorable terms.

A large part of the reason for this is because many sellers are in no position
to say no. Many times the seller is actually not profitable and running out of
runway and seeking an acquisition as a way for the founders to cash out
without having the company go bankrupt. As the old saying goes “beggars can’t
be choosers.” If you look at acquisitions where the seller was actually
profitable (for example WhatsApp), the sellers were able to get a good deal
from the buyer.

~~~
harryh
WhatsApp got such a good deal because there was a bidding war between Facebook
and Google. It had very little to do with their profitability.

~~~
vikramkr
It's probably more accurate to say "desireable" instead of "profitable" here.
The decision maker at the acquirer has to believe that there is some profit in
it from them, but that doesn't necessarily have much to do with profitability
of either side of the transaction, it could just mean a bigger bonus, or
shutting out a competitor, or so on.

~~~
tptacek
Isn't evaluating prices in terms of "desirability" tautological?

~~~
vikramkr
Yes, and it breaks away from the mindset that there's any one thing that
matters here and that it could really just be anything that any acquirer finds
they like, not just profit.

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einarvollset
“1. Big buyers are bullies: Large tech companies exert negotiating power over
founders and selling companies because they can, and stack the deck in their
favor with buyer-favorable terms.”

Well duh. Gravity is a bitch. What else is new.

The problem is more like: most tech companies that get acquired by “big
buyers” have less than $10m in annual revenue. There is very few competent
advisors in this space because most tech M&A advisors work for boutique
investment banks where $1m is the minimum acceptable fee. Hence founders
genuinely do not know if a 30x revenue or a 3x ebitda is a “great offer”

“2. Big buyers get more protection than they need: Many of these terms are
unnecessarily one-sided. For instance, buyers hold back a much higher portion
of the purchase price to cover potential liabilities than they need.”

Self serving crap. This smells like “we won’t make you make scary sounding
reps and warranties so we can pay under market” (see above re: very few
founders can tell what a great offer is, which is exactly what Atlassian would
prefer).

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tlb
"there was no single transaction where the entire escrow fund was exhausted"
\-- that's not because no one acquired a startup that turned out to be mostly
inflated metrics and bullshit.

For whatever reason, escrow funds are mostly just used for little things like
paying bills that came in after the documents closed. When the whole startup
is rotten, the acquirer doesn't usually try hard to claw back money because
management don't want to admit to themselves or their board that they were
suckers.

Also, it's very hard to tell whether a startup was about to collapse before
the acquisition, or collapsed as a result of the acquirer making the new
employees work in beige cubicles.

Something like half of acquisitions destroy value. The worst case is when the
acquired company colonizes and destroys the parent company by filling its
management ranks with stooges.

~~~
protomyth
_The worst case is when the acquired company colonizes and destroys the parent
company by filling its management ranks with stooges._

NeXT did quite well for Apple's shareholders by colonizing.

------
gortok
So we’ll fix it by putting the non-compete in our favor and making you waive
your right to a jury trial.

> Each Party hereby irrevocably waives all rights to trial by jury in any
> action or proceeding arising out of or relating to the provisions of this
> Term Sheet.

~~~
skrebbel
This is not a job contract. This is a big company paying you potentially
hundreds of millions for your shares in a company. I think a non-compete is
pretty warranted, or at least significantly less gross than the same clause in
a job contract.

Assuming they're not lying in that these are more seller-favourable terms than
any they've seen, you've appare to decided that "better" isn't good enough, we
have to burn these people to the ground unless they go all the way to
"perfect", whatever that is. If you have experience selling or buying
contracts and these terms are comparably bad, then maybe you should include
that context.

If these are the reactions companies are going to get, maybe next time they'll
think twice about opening stuff like this up to the public.

~~~
x0x0
Oh, I get why founders waiving their right to a jury trial if Atlassian screws
them is a great idea for Atlassian. The question is why is it a great idea for
the founders?

~~~
freddie_mercury
How much less money would accept to retain the right to go to trial?

Option A: sell company for $25 million and waive right to trial

Option B: sell company for $20 million and don't waive right to trial

Term sheets are negotiable, if you actually care that much about retaining the
right to a jury trial. Just tell your lawyer to strike out the term and accept
less money in exchange.

~~~
x0x0
The point of this term sheet is presumptive starting terms. Those are not
founder friendly terms. Obviously my lawyer is there to help me, but there's a
lot of inertia to starting terms.

------
doctorpangloss
The biggest losers in the M&A process are the people who are not at the
negotiating table.

------
BayezLyfe
Establishment alpha shares foobar seemingly to help startup founders, while
also aiming to maximize the number of founders aligned w/ alpha's preferred
process.

Here: alpha is Atlassian, foobar is this new M&A term sheet

Also: alpha is Y Combinator, foobar is the SAFE

Also: alpha is Y Combinator, foobar is startup school

...

~~~
otoburb
While there's probably a lot of truth to talking up one's book, I still much
rather prefer foobar(s) freely published to move conversations and thinking
forward for founders.

------
gz5
The key problem for the fish getting acquired by the whale is usually
leverage.

With the largest whales increasingly using OSS rather than M&A ("buy" the OSS
by inserting senior engineers to in effect lead it), I fear there will be less
demand, increasing the leverage imbalance.

Any other macro factors which may help the small startup either live
independently, gain M&A leverage, or forge more paths to IPO or other capital?

