Case Study: Killer App
Background
You are a member of the Board of Directors of Acquisition Corporation ("AC"). Management has requested Board approval for the cash acquisition of KillerApp, Inc. ("KillerApp").
KillerApp's financial fortunes have been declining in recent years, but it has developed a new software product that seems to have the potential to dramatically turn them around. As a result of their new found optimism, KillerApp will not agree to be acquired for anything less than "full price".
That same new product would also fit extremely well into the existing, healthy product line of AC. AC feels that they can pay "full price" for KillerApp because this new product can be put through AC's existing channels with minimal incremental cost, beyond the initial acquisition cost. They feel that the purchase price can be justified even with no value at all being given to the rest of KillerApp's business.
You retain the Chesterfield Group to help them analyze the project. Within 24 hours, the Chesterfield Group develops a number of lines of questions that eventually contribute to a different approach to KillerApp. A subcommittee of the Board uses these thoughts during a meeting with Management that reveals some "areas for further exploration" in their proposal, in time for changes to be made—changes that actually end up benefiting both sides of this transaction. This process starts with a thoughtful analysis of the shared goals, strengths and constraints of both companies.
Shared Goals
Under an outright purchase scenario, it is difficult to find a shared goal for these companies, since KillerApp will disappear. However, if they combine their strengths and develop a way to share the rewards of success, they could share the goal of maximizing the revenues for this product. Given the way the software market works, this gives rise to a secondary goal of moving the product strongly into the market as soon as possible to maximize the benefits of "first mover" status.
Strengths
- For purposes of this analysis, we assume that the single strength of Killer App is their proprietary interest in their new product.
- AC, however, has financial strength, brand awareness and fully developed distribution channels suitable for rapid and effective commercialization of the new product.
Constraints
- KillerApp's constraints relate to its size. It doesn't have the brand, financial or distribution strength to maximize its first mover competitive advantage.
- AC's only operational constraint is the current absence of the new product. However, the relatively high price they are prepared to pay for the acquisition will constrain their ability to make this product a financial success, in terms of return on investment.
Analysis
The next step is to determine why KillerApp is selling. The founders were prepared to cash out, and we need to know why. Are their reasons related to the founders themselves, such as estate planning? Does KillerApp lack some capability in order to fulfill the product's potential—something that could be provided by AC? Or, are the founders thinking that their company will never be more valuable that it is now?
Of course, that last one is the dangerous one. Perhaps, they know about a competing product about to come to the market. Maybe this new product is not really as wonderful as AC thinks it is. If it really is that good, why wouldn't the founders want to stay involved and ride this rocket to the Moon?
It turned out that the founders were quite willing to discuss their reasons, and that discussion turned us in a new direction. The founders really did believe in their new product and wanted to participate in its future. However, they felt that KillerApp was too weak to establish it in the market and achieve a sufficiently strong position in the short time demanded by this market to defend themselves against competitive reactions by much stronger competitors. They felt that AC had that capability, so they agreed to take the money and let AC enjoy the upside. They agreed with AC that the value of KillerApp, beyond this product, was essentially nothing.
Recommendation
Often the simplest solutions are the best ones. The parties scrapped the acquisition idea and entered into a branding and distribution agreement, whereby the product was distributed exclusively through AC's distribution system under AC's brand. Thanks to some thoughtful questions posed by the Board, both parties got what they wanted in a much simpler and lower risk structure.