Dawn Capital
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Dawn Capital

Making acquisitions in a time of crisis

You might not feel like now is the time to think about acquisitions, and sure, the uncharted waters we’ve all spent the last few weeks navigating have not helped M&A activity globally: according to Dealogic, the value of M&A deals in the first quarter of the year was significantly lower than the last quarter of 2019, down 35% around the world.

But acquisitions have certainly not stopped, especially in tech. A few weeks ago, in the midst of lockdown, San Francisco-based Brex completed a deal to buy three other startups. And this month, one of our investments, Tink — Europe’s leading open banking platform — acquired Eurobits Technologies for €15.5m.

Deals like these are still going ahead because times of crisis are also an opportunity to build. If you’re considering boosting your business and expanding your operations through an acquisition, here is some advice.

The benefits of acquisition

First off, consider what you want to achieve through an acquisition.

Product acquisition: Buying a smaller startup will enable you to add its features, tools and capabilities to your own products and services. This will help to build your platform and expand your customer offering.

This is what the team over at Showpad did in June 2018 when they bought LearnCore for $50m. Showpad’s core sales enablement product was giving customers’ reps the right knowledge, but the vision was to build a fully integrated sales enablement platform — which meant offering training too. Acquiring LearnCore, a leading training and coaching platform, and whose team had the same vision, achieved this.

Geographic expansion: Buying a player in a certain country allows you to gain a strategic foothold in a new market and may bring you closer to your customers.

Customer acquisition: By buying a direct competitor or rival startup, you gain access to its customer base and reduce competition in your sector.

Often, geographic expansion and customer acquisition sit side by side; achieving them both is what Tink, a company we led a €90m round in at the beginning of the year, did by acquiring Spanish start Eurobits. The latter gave the open banking platform a ready-made customer base and revenue in a target geography. Tink had the product and tech, but acquiring Eurobits customers enables it to accelerate its journey.

Why now is a good time to make an acquisition

You might feel that the only option right now is to hunker down and wait for the crisis to blow over. But there are strong reasons for exploring acquisition opportunities in the current environment.

It is worth noting that, during times of crisis, it may be best to focus on your product. We will eventually come out the other side of this pandemic, and when we do, customers will be ready and able to spend once again. So it’s important to spend this time developing a stronger and more differentiated product offering, and be ready for the recovery.

As such, geographic or customer base-driven acquisitions might not be as relevant, compared to the opportunity offered from buying a smaller startup with attractive product capabilities.

Fast track development: A product-driven acquisition could allow you to accelerate your roadmap and platform strategy, allowing you to emerge from the crisis in a much stronger position.

Valuations: Prices for acquisition targets are falling in these turbulent times. A startup that seemed expensive last quarter could now be much more affordable.

Talent: With employees facing furlough or being made redundant, now is a great opportunity to acquire top-class talent in product development.

Lastly, consider the seller’s perspective. Founders may now be more willing to sell, as they realise their business is experiencing turbulent times. Their prospects for growth or exit options have likely dried up, so selling to a larger company will provide them with a softer landing — especially if their product has not yet reached escape velocity.

Challenges to consider

Pursuing an acquisition during a crisis can raise some unique challenges. Here are some things to consider before chasing a deal.

Cash is king: As a scale-up, you are likely to be more stable than early-stage startups during this crisis because you have a more developed product and a wider, more diversified customer base. But that doesn’t mean you are immune to customer budget cuts.

As such, it’s important to preserve cash in order to maintain sufficient runway and weather this storm. Spending those reserves on acquisitions may therefore be risky, so consider alternative deal structures, such as using more equity, or offering earn outs over time, rather than cash upfront.

Communication: Consider how your staff will react to an acquisition. If you’ve had to let go of members of the sales & marketing team because customers aren’t buying at the moment, then acquiring developer talent may send a mixed message. Ensure that your organisation understands the strategy and opportunity behind your decision-making.

Managing change: Your company is likely to be going through tremendous change during this crisis. So adding to that by integrating a new team from a target company with its own culture could prove a challenge. At the same time, this crisis is an opportunity to implement radical changes to your organisation that might not have been possible beforehand.

Covid-19 is clearly a challenge for all businesses. But rather than viewing this crisis as a moment for despair, consider how you can use this time to build your company and make it stronger than ever.

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