Case Study: TechWhiz
Background
You are the CEO of a large and rapidly growing web hosting company. Much of your growth has resulted from an active ongoing acquisition program. In his weekly report, you are disappointed to hear from your head of that program that he will not continue the pursuit of TechWhiz. You were intrigued with the company's technology that held the promise of increasing the effective capacity of your entire system by as much as 5%. If initial tests suggesting those numbers proved right, their acquisition would give your company a huge competitive advantage. However, your acquisition man said that absent certainty of the benefits we simply could not get there on price. TechWhiz would not budge on their demand that reflected all of that improvement, but there was no way to be certain that the entire potential would be realized. TechWhiz was insisting that we pay full price because there were other competitors out there who would, if we would not.
Before sending the recommendation officially to the shredder, you retain the Chesterfield Group to take a look and see if they could suggest some way to salvage this interesting situation. Our analysis unfolds along the following lines.
Shared Goals
Both TechWhiz and you want their technology to live up to its fullest potential and dramatically improve your company's competitive position.
Strengths
You are large, well financed and have a widely recognized brand. TechWhiz seems to have a good, although unproven, technology that could dramatically affect your system or that of several of your large competitors.
Constraints
You are constrained in this situation by a desire to avoid overpayment for an unproven technology you have seen opportunities to do this many times in your acquisition history, and prudence has generally been the best course of action. TechWhiz is constrained by its small size and unknown brand, as well as by the fact that their technology is unproven on a commercial scale such as the one we present.
Analysis
Breaking the pricing stalemate is relatively simple. Replacing the whole idea of an acquisition with a licensing agreement, with variable payments, depending on the actual performance would do the trick. However, there is the follow on question of maintaining the competitive advantage. You either must convince TechWhiz to give you an exclusive license, in which case the pricing issue will probably again raise its head, or you have to find a satisfying form of non-exclusive licensing. In this case, we recommend the non-exclusive, but with the additional feature that you would receive a portion of the royalties made by TechWhiz from other future clients.
Rationale
Even though, under this approach, you could not permanently hang on to the advantages of this technology, such advantages are rarely permanent in this business anyway.
This approach does two things for you
- Provides a head start
- By virtue of the shared royalties from our competitors, it gives you a little permanent edge on the benefits.
TechWhiz also gets two benefits:
- Assuming that its belief in its technology is well founded, it gets fully rewarded
- It also gets to use us as its prototype to prove its product and use that fact to relatively quickly take the rest of the market and in this business having first mover status is very important.