Rapid Advance

Mergers & Acquisitions, Partnerships, Restructurings, Turnarounds

and Divestitures in High Technology

David J. Litwiller
 Copyright © 2008 by David J. Litwiller.
All rights reserved. Except as permitted under the U.S. Copyright Act of 1976,
no part of this publication may be reproduced, distributed or transmitted in
any form or by any means without prior written permission of the author.

Library of Congress Cataloging-in-Publication Data

Contents

Strategic Partnerships 1
Small-Large Business Pairing 8
Minority Equity Ownership 9
Earn-Outs 11
Joint Ventures 13
Exit Provisions 15
Mergers and Acquisitions 18
Operational Success 21
Catalytic Technology Overlap 29
R&D Team Concerns 30
Early-Stage Acquisitions 31
Conflict Management 32

Staffing and Culture 35

Quickly Turning Newcomers into Productive Employees 35
Executive On-boarding 36
Keeping New Employees Aligned 37

Market Targeting 39
Maxim 39
Segmentation 39
Market Assessment 41
Promoting Novel Technology 44
Pace of Technology Adoption 46
Improving Market Entry Decisions with Comparison Case Analysis 48
Growth Strategies 50
Attacking Established Markets 53
Adoption Thresholds 54
Trading-Off Among Development Time, Cost and Performance 55
Breaking Juggernauts 57
Expanding Share within Established Markets 59
Pursuing Emerging Applications 60
Addressing Fragmented Markets 61

Navigating Dynamic Markets 65

Using Market Volatility to Build Share 65
Leading Indicators of Slowing Demand 71
Push Marketing 73
Sustaining Push Marketing of Advanced Technology in Maturity 74
Marketing Metrics 75

v
Ecosystem Relationships 79
Recruiting Partners 79
Setting Interoperability Standards 80
Industry Associations 90

Growing Sales 91
Success Formula 91
Variation 93
First Customers 93
Learn Quickly 93
Staffing 94
Diagnosing Trouble 94
Scaling-Up 96
Indirect Channel Sales 97
Cross Selling 97
Performance Metrics 100
OEM Customers 100
Customer Funded Development 101
Good Practice 103
Other Comments 103

Restructuring 105

Turnarounds 109

Divesting 121
Decision to Dispose 122
Objectives 125
Process 126
Preparation 126
Sale Method 133
Creating Competitive Auction Bidding 136
Marketing and Appraisal 139
Audience 139
Collateral Documents 139
Due Diligence 142
Negotiating 143
Signing to Closing 143
Separation 144
Timeline 145
Communication 146
Challenges and Advice 147
Advisors 148

vi
Bibliography 151

About the Author 155

vii
Introduction

The speed and complexity of change in high technology’s business

landscape requires rapid evolution. To enduringly thrive developing,
producing and supporting technology-driven products and services, a
business has to quickly advance. Capabilities and managerial focus
constantly adapt, sometimes tectonically.

Mergers, Acquisitions, Partnerships, Restructurings, Turnarounds and

Divestitures are essential tools for transforming a technology-based
enterprise with requisite speed and agility. The author presents a
condensed guide to devising and implementing major business
changes.

Chapters also address strategic marketing, sales and ecosystem

relationships. New products, services and processes are the foundation
of most partnerships and other types of business reconfigurations. A
strong grounding in marketing, sales and strategic linkages sets the
stage for augmenting or refining a business. Moreover, significant
executive ego and achievement pressures influence large business
moves. Customer and partner rationale can be stretched to cement
authority for change. A back to basics view of the most influential
marketing strategy, sales and external business network factors puts
the soundest footing under new business configurations.

ix
 1

Strategic Partnerships

The principle objective of strategic alliances is access to

complementary markets and technologies, much faster or with lower
risk than otherwise possible. Greatest impetus to form affiliations
usually comes if development costs are rising quickly, particularly
where they’re faster than the company’s rate of growth, and, product
life cycles are contracting.

The benefits of strategic relationships include speeding development

time, reducing marketing and technical risk, attaining cost
competitiveness, acquiring individuals of rare talent or other valuable
assets, and blocking competitors. Inexorable technology and market
change makes strategic partnerships such as outsourcing, alliances,
joint ventures and acquisitions increasingly important. Responding to
a changing environment, partnerships can rapidly improve or defend to
sustain and advance competitiveness.

The complexity of strategic partnerships increases with the rate of

growth, heightening the importance of honouring conventional
wisdom about these unions. Links in the chain of success include:

• Mutual respect
• Shared goals and vision
• Strong mutual commitment
• Joint pragmatism
• Vigorous ability to innovate
• Trust
• A single integrated team
• Fairly shared risk

Fulfilling these simultaneous elements of a productive linking requires

extensive relationship surveying and engineering.

Partners see in each other the ability to access strategically vital

capabilities in a harmonious manner that is not readily available
elsewhere. These rare capabilities need to provide mutual contribution
2 Rapid Advance

that will be sustainable over the long-term. Joint dependence sets the
stage for the other elements of a successful partnership. Both
organizations need to feel that they have picked winner partners, and
mutually work to make each other and the combination successful.

The boundaries of partnership must be well defined, such as whether it

is for a technology, product group, application sector or geographic
market. Articulating limits for the relationship is usually crucial to
achieving buy-in on both sides, and at several management levels.
Defined boundaries also reduce the likelihood of migration into
competitive positions.

Partners must have similar objectives, shared vision and strategy, as

well as compatible cultures, values and personalities. These are the
foundation of success. They are fundamental to a workable pairing of
two entities, yet also among the most difficult aspects of prospective
partnerships to assess. Vision and culture embody many things, and
one can never have complete information about another. Even when a
partnership seems harmonious at one point in time, the subtleties of
different history and personalities, as well as unforeseen future events
means that there are many forces that can separate objectives.
Communication, shared vision and common strategy keep outlooks
aligned.

Compatibility of culture, personality and values, as well as trust enable

two other aspects of the pathway to success: a willingness to change
that engenders adaptability; and, open access to each others’ strategies,
which abets effective planning.

At the same time, the strong mutual commitment at the core of any
successful, sustainable relationship must be cemented in ways so that
when things get tough, neither party can easily walk away. This
begins with unwavering support at the outset from senior management
at both firms. Commitment paves the way for measures such as
investing in each other, sharing development costs, and contractually
committing to supply and purchase terms. Prospective partners must
have comparable stakes in the success of the venture. Otherwise, a
more traditional superior-subordinate relationship will arise from the
different importance each party places on the relationship, which will
 Strategic Partnerships 3

undermine effectiveness. Cross-commitment should not go so far

however as to become a suicide pact. Some mutual barriers to exit
from the relationship are necessary, but if conditions deteriorate badly,
both parties should strive to preserve a survivable way out.

Strategic alliances in turbulent technology-driven environments have

the greatest chance for success if both parties are adaptable and
innovative in technology, products, markets, and business processes.
Creating and then managing new products, services and processes is
ultimately what linking is about. Thus, innovation and flexibility are
at the root of both companies’ abilities to make the relationship work.
Organizations that innovate naturally, in both technology and
processes, have improved chances of pairing, particularly as the degree
of departure from the familiar, the amount of co-operation, and level
of interaction all climb.

Prospective partners must be pragmatic about the likely duration of

their alliance based upon the rate of change of the underlying
technology and environmental conditions. If the rate of change is slow,
association can typically last much longer than if the rate of change is
rapid. The overriding consideration is that the union can only be viable
as long as the joint effort maintains leadership in technology, quality,
and market access.

Furthermore, partners need to trust each other. Reliance should be

safeguarded through comprehensive mutual intellectual property
agreements. An intellectual property protection framework allows
both parties to be forthcoming with each other, delivering full and
unencumbered disclosure about technology, markets, and other
sensitive matters. Trust is the cornerstone of communication.

Communication comes when the relationship is carried out with a

single team, carefully structured with players from both parties. The
crux is to understand who the key people are, and how they fit into the
resulting joint organization so that they can continue doing what they do
well. Take measures to ensure that the pivotal people remain with the
integrated team. Don’t just talk to the top people. Get to know the
second level people as well.
4 Rapid Advance

The skill is to figure out who are the most connected experts. They are
often not in the most prominent positions on a traditional organizational
chart. They are identified by asking a wide range of people which
colleagues they consult most frequently, who they turn to for help, and
who boost their energy levels. This is how to get a sense of how work
really gets done among a group, to help identify talent, and nurture the
most in-the-know employees. A single team of the brightest and best
among the two groups is then more easily built.

The unifying force of a single and consistent team, as well as channels

for regular and open communication among them contribute to a
successful co-operation. High bandwidth, low overhead
communication channels vitally foster adaptability to prevail in a
changing environment.

Partners must also fairly share risk. Cross investment is one

dimension, in both money and sweat equity. Partner firms need to
develop cross-functional capabilities, and be committed on both sides
to understanding each other’s processes, systems, workflows,
organizational structure, priorities, and reward systems. The two sides
can’t just get familiar with each others’ products and technology.
Knowing the way each other functions helps work get done across
organizational boundaries. Partners can then better make mutual
obligations to specific business, technology, competitiveness, and
quality milestones. Formal performance yard sticks help to signal for
corrective action as combined effort progresses. Up front
understandings and obligations diminish the likelihood for partners to
subjectively criticise each other, and maintains focus of both on
critical objectives.

Among the most important characteristics of strategic partnerships is

to deliver the whole product necessary to win market leadership. Why
is this so important? The reason is the largest and most profitable
revenue streams flow to market leaders, creating longevity of an
attractive market position to retain priority attention from the coterie.
Furthermore, with market leadership and the whole product, success
becomes more likely. This is because the fate of the initiative is then
largely within the collaborators’ control, rather than a disproportionate
dependence on outsiders who may be difficult to influence. Partners
 Strategic Partnerships 5

need to construct a relationship with market leadership and the whole

product as prime objectives.

When formulating and operating a joint effort, partners sustain success

by making required compromises in equal measure at the same time.
Trade-offs by one should not be made in exchange for unspecified
future considerations from the other. This leads to disappointed
expectations, and can undermine an otherwise sound co-operation.
Investments by both partners throughout the alliance should be
specific and mutually agreed upon.

Regardless of planning and efforts to make exchanges in real-time,

disputes will arise. A conflict resolution process gives each party a
defined avenue of redress for unforeseen issues that come up. A
dissention work-out mechanism should be part of the up-front
partnership agreement. After difficulty strikes, agreeing upon a
resolution vehicle becomes significantly more difficult.

Firms seeking competitive advantage through joint efforts can pursue

different levels of involvement. Strategic partnerships cover a
spectrum from low to high co-operation and interaction:

• Purchase agreement, where even this basic level of partnership can

be complicated for strategically critical elements because of
exclusivity and mutual obligations
• Patent or technology license
• Franchise
• Cross-license
• R&D consortium
• Co-production
• Product or market exclusivity
• Minority equity participation
• Joint venture
• Merger
• Acquisition

Considering this spectrum, lower co-operation and interaction

alliances can often come together more quickly, as well as disband
6 Rapid Advance

more easily when the basis for the alliance changes. Less involved
structures also provide an easier environment in which to bring in
multiple partners. Higher co-operation and interaction alliances
should be used as the scale of investment and cost of failure climb.

Whatever legal form, and sharing of risk and reward, partnerships

between companies are like any other where the greater the interaction
and co-operation, the more particular each company should be. Many
possibilities for joint ventures, mergers and acquisitions should be
evaluated, but only a minority completed. The right ingredients and
timing are rare. Businesses must be particular when contemplating
prospective partnerships, especially as the relationship becomes more
involved.

Characterizing a prospective partnership requires detailed due

diligence. It is a significant part of obtaining reliable information
about the quality of the assets on the other side. However, unlike the
perceptions of some, the purpose of due diligence isn’t so one can find
issues in order to negotiate better. Some jockeying goes on, but
arming for negotiation is not the lasting value of due diligence. The
larger and ongoing benefit that endures after the partnership goes into
operation is to identify issues so the relationship can be better
managed.

To fully assess opportunity and risk factors, due diligence in

evaluating potential partners should include:

• Technology
• Products, including products under development
• Markets
• Sales, service and support
• Marketing
• Customers, especially customer satisfaction
• Operations, including production and sourcing
• Legal and regulatory circumstances
• Management
• Employees
• Culture
 Strategic Partnerships 7

Financial considerations should also be part of investigations for

strategic partnerships. However, a trait of relationships offering rare
opportunity for dramatic growth is typically that financial profiles of
current circumstances are of lesser importance than other due diligence
items. 1 This is because non-financial matters dominate joint
innovation capability and the capacity of joined organizations to create
competitive advantage and sustained long-term increases in
shareholder value.

Nevertheless, financial due diligence should cover:

• Return on investment
• Earnings per share contribution
• Discounted cash flow: estimated future cash flows discounted back
to present value
• Residual (terminal) value
• Free cash flow: earnings plus non-cash charges, less the capital
investment needed to maintain the business
• Economic value added: a combination of net profit and rate of
return, in a single statistic; net operating profit after tax, minus the
weighted average cost of capital

Most of the preceding partnership discussion has been about formation

and operation. However, cessation must also be considered. Some
take the view that cessation of a consociation is a sign of failure, as it
is in marriage. But, in changing technology and market circumstances,
an end is often a natural outcome, even with a short life span. Partner
companies’ failure to plan for termination is more often the avoidable
shortcoming. Greater time typically is invested in formative decisions
than cessation. Management of partnering firms should consider how

1
The most common exception to a secondary role for near-term financial
circumstances is in acquisitions where the firm to be acquired is comparable in size
or larger than the acquirer. In such cases, the acquirer may not have the financial
resources to carry the target, should significant difficulties within the target business
arise post-transaction. If so, financial due diligence, particularly regarding margins,
cash flow and net income becomes a chief due diligence and decision matter.
8 Rapid Advance

to terminate the united effort, including buyout provisions, and the

effect on each of the parent companies.

Small-Large Business Pairing

There are special considerations for small firms. A common issue for
a small organization seeking strategic partnership is that the
prospective partner is much larger and better established. This
incongruity presents some interesting challenges. Regardless of size,
the bottom line remains that both see in each other the ability to access
strategically vital capabilities in a harmonious manner which is not
readily available elsewhere, and a mutual significant ongoing
contribution. But, timing is significant, particularly for the larger
partner.

Sizeable prospective partners generally are best approached in slow

times. Overtures to larger partners during quieter times are important
when the initial business volume prospects from the collaboration are
low, as often happens while technology, product and market
development take place. Larger potential partners need to be solicited
when they will be more receptive to speculative ventures to fuel
growth. This is when they have the best chance to see the need for
significant innovation to propel future expansion and most likely to
take an open-minded look at the potential of the smaller player’s
technology and capabilities.

Partnerships of disproportionately sized companies also need to

contemplate an instability effect when considering interaction short of
merger or acquisition. If the little company ends up being important to
the big one, the big company often cannot risk not owning the little
one. On the other hand, if the little company ends up being
unimportant to the big one, it will be cast-off, often badly wounded.
The smaller company frequently needs to be willing to be absorbed or
be cast-off, as one of the costs of the partnership. Exclusivity and
take-over provisions are common requirements of a larger partner that
can lead to the instability effect. Stable long-term co-existence for
disproportionately sized partners, who haven’t merged, is unusual.
 Strategic Partnerships 9

Partnerships of dissimilarly sized business also can undergo increased

risk of “hold-up” compared to like-sized collaborating entities.
Typically, one firm or the other makes investments specific to the
particular co-operative project, where those assets have limited value
in other uses. The gravity of sole-purpose investments is often much
greater for the smaller firm. The mismatch of dependency and sunk
costs for the partners creates the possibility that the other firm will
delay, in terms of payment or other corresponding forms of
participation, in order to gain advantage, perpetuate the status quo, or
renegotiate the terms of the deal.2

Managers need to assess hold-up hazards, and the effort necessary to

monitor and avert opportunistic behaviour. Determining risk, and the
amount of work to avoid difficulty, requires a clear understanding of
relationship-specific asset investments. Where the risk of hold-up
would otherwise be considerable, equity ownership by one firm in
another is often a vehicle for bringing alignment of interests,
especially between disparately sized firms.

Minority Equity Ownership

Short of complete ownership, partial equity participation by one firm

in a (typically) smaller partner is one of the significant influence-ors
that partners have to help align objectives and incentives. The way
partial equity ownership helps is by giving the entity buying-in real
skin in the game of the target’s business. It works best when the
buying-in party delivers a major piece of the puzzle that the investee
company is missing, and when there is joint desire to work together
rather than a forced marriage.

Building on these elements of success, the degree of equity ownership

of one firm in another can be used to provide:

• Exclusivity and control

2
“Choosing Equity Stakes in Technology Sourcing Relationships,” Kale and
Puranam, California Management Review, Spring 2004
10 Rapid Advance

• Alignment of interests

• Inter-organizational co-ordination, including linking or regrouping

activities across organizational boundaries to share knowledge and
control

At the same time, the cost for one firm taking an equity stake in
another, especially a smaller firm, can be summarized as:

• Reduced entrepreneurial motivation for the staff and management

of the target, due to changed incentives and work conditions

• Commitment cost to a particular technology, in an environment of

uncertain viability for the technology

• Commitment cost to a particular marketplace approach when there

is volatility about the structure of the industry, the target
marketplace, or demand for the technology

Equity ownership plays an important role accessing valuable resources,

ensuring they remain unique and difficult to imitate. The benefits and
costs of equity participation for both sides can be assessed using the
above framework.

As the benefits of equity ownership grow, and the costs decline, the
degree of equity ownership of one partnering business in another
should increase.

Where the benefits and costs do not point to a clear conclusion about
equity participation, creative deal-structuring and post-transaction
business unit incentives are one way of reducing complexity.
However, an unclear cost-benefit assessment of equity participation is
more often a signal that the partnership with an equity stake may not
be a good bet.
 Strategic Partnerships 11

Earn-Outs

Equity participation often is suitable, but there is a valuation gap

between buyer and seller. To bridge the separation, a contingent
payment is the typical contractual mechanism. This is a variable
payment tied to future performance of the acquired business. It
addresses future business risk when exchanging significant ownership.

In the technology arena earn-outs are common. Many companies are

targeted for equity investment or acquisition after they have created
valuable technology, but before time has proven out that value in the
marketplace through revenues and profits. The advantage of an earn-
out is to create incentive within the acquired business for future
performance. It is a way for the seller to obtain a higher price, as they
prove the market value in the future. As well, contingent payment
lowers the purchaser’s risk of overpaying, lessens the impact of
differences in information and outlook between purchaser and seller at
the time of the transaction, and provides credibility from the seller
about the asset’s worth.

At the same time, earn-outs carry challenges and unintended

consequences. They can strain the new working relationship if
structured improperly. One difficulty can be the incentive for the
target’s management to maximize the payout formula at a defined
moment in time, which can be at odds with the better long-term
interest of the business. To create a more balanced view between
short- and long-range, graduated payments staged over the term of the
variable payment are usually better than one-time payment schemes.

Another consideration with contingent payments in equity transactions

is if structural integration with the acquirer is necessary for co-
ordinated operation. After amalgamation, it often becomes difficult to
evaluate or even measure the acquired unit’s stand-alone performance.
Linking the contingent payout to actions beyond the target
management’s control introduces significant complexity when
operational integration is foreseeable. Earn-outs are most successful
when the operating entity continues to be largely independent after the
investment or acquisition. In particular, the budgets for marketing and
development as well as distribution channel access should be
12 Rapid Advance

definitive. This way, both sides of the earn-out agreement have

greater assurance that the target entity will have the resources to
deliver its potential.

A further piece of the earn-out puzzle is management retention.

Where extensive integration and control of the acquired entity is likely,
but it is still desirable to retain the unit’s incoming management for
continuity or leadership, it can be better to replace the contingent
payment with a flat retention package. This is a fixed monetary sum
the target’s management receives for staying a certain period of time
post-transaction. To provide flexibility and buyer protection, the static
stay-pay incentive should include the option at the purchaser’s
convenience to pay out and part ways with the target’s management.

A fixed fee mechanism gives the acquirer the latitude it needs to make
structural and management changes to achieve integration. Sometimes,
the acquired management cannot break themselves of the habits of
independence, and rebuff integration efforts. The difficulties may
even be partly due to overreaching commitments of the acquirer during
sale negotiations about post-transaction independence. However
integration friction arises, a flat retention incentive with a unilateral
pay-out option for the acquirer reduces the risk of acquiring inexorable
management liabilities that impair co-ordination. In particular, a flat
sum buy-out clause curtails the possibility of the acquirer being held
hostage by the target’s management about changes that ultimately
inhibit the ability to make the equity partnership work.

The pragmatic implication of these factors for an earn-out is that the

time frame should typically be no more than three years. Integration
becomes more difficult to avoid the further into the future the
contingency term extends. At some point, operations will be
integrated, or set aside, and it will make sense to eliminate the trouble
of earn-out calculations.

Contingent payments are a constructive tool in equity purchase deal

structuring to align purchase value and incentives, but that utility has
limits. As a practical matter, they are best used when an acquirer and
target have an incoming valuation for the acquired business that is
within a factor of five of each other. If the valuation spread is larger,
 Strategic Partnerships 13

typically even an earn-out will not provide enough of a bridge in time,

information and value to reach an agreement. At the other end of
valuation difference, when the gap is small and valuations by
purchaser and target are within 20% of each other, usually it is better
to continue negotiating and arrive at a single monetary figure. When
valuations are this close, the negotiations and post-transaction control
risk around a contingent payment mechanism can introduce more
complexity than it eliminates. With a small valuation gap, it is usually
better for both sides to transact at a single final valuation without
resorting to an earn-out.

When earn-outs are used, they can be based on revenues, operating

income, development goals or other factors. Definition and
interpretation issues can complicate earn-outs, so measurements and
milestones should be picked that are well defined and subject to little
interpretation. Subjective or complex formulae muddy the waters.

It is also important to uncover as much as possible about each side’s

risk preference and motivations during negotiation, in order to
structure an earn-out that meets both parties’ objectives. Unspoken
ambitions behind equity participation or sale will complicate the
contingent payment, as well as the partnership.

Earn-outs can be a good way to bridge a price gap between buyer and
seller, when they cannot arrive at a single figure. But life is simpler if
the transaction can be structured without a contingent payment. Every
avenue should be explored to reach a meeting of minds for valuation
and future incentives without an earn-out, before entering into one.
Nevertheless, under the right conditions of valuation gap, managerial
control, measurability and access to resources post-transaction, earn-
outs can play a role aligning incentives and valuation.

Joint Ventures

Among the range of partnership mechanisms, joint venture (JV)

deserves special mention. As a definition, a JV is a company funded
by two or more partners, who then jointly share in its profits, losses,
and management.
14 Rapid Advance

Joint ventures are typically used where:

1. An opportunity is strategically imperative for the partners, but the

cost or risk for either company to go it alone is prohibitive. Also,
access to some foreign markets can mandate engaging a local
partner in a JV.

2. Informational differences exist among prospective partners,

especially major mismatches that depend on deep and often tacit
knowledge which do not tend to be revealed well during due
diligence. These forms of private information can arise from
market knowledge, technology, or business processes. Operation
of the JV provides a mechanism for assimilating information and
developing a shared outlook.

3. The cost of collaboration over the near term is relatively small, and
uncertainties or information transfer will be resolved over the
medium term.

Under these circumstances, JVs tend to align incentives with

manageable unintended consequences to form effective partnership
mechanisms. As time goes on, JV’s can often be sequential
investments, leading to future investments and outright buyout, as
uncertainties diminish.

In some ways, JV’s are even more complex than acquisitions. JV’s
can bring in issues that never need to be addressed in an outright
business purchase. In an acquisition, after the close there is a single
owner with full decision authority. JV’s in contrast generate ongoing
issues to be resolved among two or more parent companies regarding
operations, management and governance. JV’s are also complex to
negotiate and operate because in many ways they are an unnatural
business form: JV’s require sharing, and most business strategy is
about capturing.

JV’s typically require a series of contracts to implement,

contemplating many contingencies and conflicts that may arise, and a
mechanism to deal with them. As a result, JV’s commonly take twice
 Strategic Partnerships 15

as long as acquisitions to negotiate. Whereas acquisitions typically

take three to six months to complete, six to twelve months can elapse
initiating a JV. The time commitment to enter a JV can come as a
shock since some people envision a JV as a smaller deal than an
acquisition. People are usually mistaken who expect comparatively
faster deal structuring and implementation for JV’s than M&A.

Considering operation, splits of ownership and control have a strong

impact on downstream roles and responsibilities for JV partnering
companies:

• 50%/50% provides equal influence over management, operations

and governance, but at the price of perpetual negotiation among
parents.

• Asymmetrical ownership requires that the minority partner cede

almost all managerial and operational control. The test for a
prospective minority partner is whether they’re ready to step aside.

• There are jurisdiction-specific thresholds of ownership and voting

control that dictate whether the owner companies need to report the
performance of the JV in their consolidated financial statements.
Especially if significant operating losses are expected from a JV,
financial reporting obligations can shape ownership split preference.

Exit Provisions

Much of the discussion about JV’s deals with formation, but

termination also needs attention. Joint ventures are usually transitory
structures, lasting six years as a broad average. With a relatively short
life span, partners need clear agreement at the outset about how the
end of the venture will be handled. A JV can come to an end when it
has achieved both parents’ objectives. It can also come to a
conclusion because of poor performance or parent deadlock. The
parties to a joint effort need to consider termination during the
formation of the venture.

By way of motivation to consider completion of the JV during front-

end negotiations, consider that about 85% of JV’s end in acquisition
16 Rapid Advance

by one of the partners. To boot, there is even an operational and

success probability dividend for the JV from defining exit conditions
during formation. It arises because absent an adequate separation
agreement, the strains of operating the partnership with no viable way
out encourages each partner to appropriate as much value as possible
from the alliance. Aggressive partner behaviour sours relations and
provokes animosity. Under such dysfunction, performance diminishes
and can even tip the JV into demise. Documented exit conditions from
the outset reduce strain in the relationship of the JV and help it to
succeed.

To put exit provisions in place, both sides need to express conditions

under which it makes sense to divest their interest, or to terminate the
venture, and the manner in which those outcomes will be carried out.
Master exit conditions usually include four components:

1) Exit triggers, defining the point of disengagement

2) Each party’s rights in a separation to assets, products, employees

and third party relationships such as suppliers, customers and
partners

3) Articulation of the disengagement process, including strategic

options, guidelines for creating the disengagement team, and
timelines

4) Communication plan, embracing customers, employees, suppliers,

partners, financial markets and other relevant constituencies

Considering the first item, exit triggers, typical circumstances to

provoke the end of the JV include the inability of the alliance to meet
certain milestones, performance metrics or service levels. Other
dissolution conditions commonly used are breaches of contract terms,
and, insolvency, change of control, or strategic re-direction of one of
the partners. Completion of the JV’s objectives, or, sharply changed
competitive circumstances can also signal that it is time to disband.

Next among exit elements are separation entitlements for the partners,
covering the post-JV period:
 Strategic Partnerships 17

• Inventory of products, materials, equipment, IP, land, and facilities

• Revenue sharing, royalties, licensing, and options to buy or sell

products and services in the future that were created within the JV

• Rights and obligations to fulfil contractual commitments from the

JV, including to customers, suppliers, service providers, employees
and finance entities

These separation privileges should also aim to reach closure on

liabilities for disengaging partners. Delineating entitlements and
liabilities sets the stage to detail the process of disengagement,
including:

• Rights of first refusal regarding separation claims

• Mandatory unwind period, to give each partner enough time to

implement its exit plan, as well as giving the JV the time it needs to
meet its obligations and stay competitive if it is to remain a going
concern

• Formation of the core disengagement team. The team usually

includes members from the JV, as well as each corporate parent.
Best disjoining results often come from assigning new personnel
from the parent companies, apart from those that oversaw the JV, to
promote impartiality in the separation team through the process

• Timeline

These items represent the broad elements of defining exit conditions

for a JV that respects its likely transitory nature, as well as operational
benefits of having clearly defined exit provisions.

Since partner buyout is a common outcome, as a minimum endgame

JV partners can use a nominal cost put option. It gives each party the
right to sell their part of the business after an initial term for a nominal
sum, so that they have a clear way out from a JV that isn’t working.
18 Rapid Advance

The put option may also include a penalty clause for invoking the put
prior to the expiration date of the initial term of the JV.

For a structured buyout under stronger JV performance, there is often

also a call option in the form of a shotgun clause. This is where both
parties offer a price at which they will buy the whole business. The
parent that proposes the higher valuation tender wins. The other side
gets a payment for being bought-out that they should consider
reasonable. As an alternative to a shotgun, especially when there are
strong ownership or parent resource disparities, each side can also
arrange a fair market valuation, with a negotiated sale price, and an
option to go to arbitration to break negotiation deadlock.

Detailing disengagement terms adds value to a JV. However, the

complexity of separation scenarios highlights that joint ventures are a
complex tool for managing risks and rewards in a competitive
landscape. They are a powerful way to achieve business objectives.
There are many situations where JVs are appropriate. But, the time
and difficulty initiating and operating a JV means that there should be
ample exploration of whether there is an alternative contractual way to
get the same result, before deciding to enter into a JV.

Mergers and Acquisitions

Companies that sustain rapid growth generally achieve much of it

organically, but often augment internal activities with the highest form of
partnership: mergers and acquisitions (M&A). M&A acumen is
frequently a key skill for high growth, technology-driven enterprises.
 Strategic Partnerships 19

The M&A motivation is that in a fast changing, technology driven

industry, it is nearly impossible for an established company to fully
develop and experiment with all of the technologies and business models
that will potentially affect the competitive landscape. Even if the money
can be found to finance so much activity, the war for talent makes it
practically impossible to find enough skilled people. External
technology development, business formation and Darwinian forces need
to have room to play out. The winners can then be acquired.

The need to rely in part on external means to achieve world-class

products grows with increasing product complexity. M&A also becomes
more important with increasing specialization among industry players, or
decreasing product life cycles.

M&A succeeds through innovation in technology, products and

business processes. But, the speed of innovation and adaptation is
vastly different between organic development and M&A. The
difference in speed, and the underlying power of change, is a crucial
distinction. In a technology-centric business, the time to move
organically from idea, through product development, launch and
marketplace ramp-up to a point of significant positive top-line and
bottom-line financial impact is typically three to six years. The time
can be a bit faster in some asset-light businesses, and stretch
considerably longer in asset-intensive businesses such as large-scale
capital equipment and biotechnology. But, three to six years from idea
to significant positive financial impact is the norm. The organically
growing business usually has three to six years to fully adapt and
evolve for major initiatives.

Contrast this with M&A. In M&A, integration needs to happen in

three to six months – remarkably faster. Some aspects of integration
take longer, but substantial portions of activities need to merge this
quickly. The scope of interaction goes far beyond establishing a
standardized accounting or enterprise resource planning system.
Technology M&A usually has one to two quarters to develop
collaborative programs. Unified projects span R&D, strategic
marketing, operations and management processes. M&A needs
adaptation to happen across the business an order of magnitude faster
than organic change. One can think of M&A like adding a high
20 Rapid Advance

combustion substance such as nitrous oxide to the fuel stream of a

piston engine. A suitably adaptable, conditioned system can
constructively harness the increased power from the higher energy
input, unlike a poorly designed or unprepared system that will rebel.

The shock wave of innovation in M&A propagates through business

processes, products, and the culture of a company. M&A can make
the company move much faster, and productively so, but only with the
right opportunities, attitudes, capabilities, and execution. Years of
organic technology and marketplace development can compress into
just a few months through M&A, but the force necessary to achieve
this velocity of change deserves a lot of respect.

The harsh reality of M&A is that by objective measures, a significant

proportion fails to meet up-front expectations, even with the best
intentions and apparent fit of the partnering businesses at the outset.
External and internal events in technology, markets, preferences, and
key personnel can present barriers to success. Management must
understand the typical sources of difficulty, and design the relationship
to counteract detrimental forces.

First off, the core business of the acquirer has to be sound. If the
acquirer gets into trouble during integration, the internal crisis distracts
from making the acquisition work. Deals built on strength are far
more likely to succeed than ones not.

Even with a healthy acquirer, the challenges in M&A are significant.

So must be the opportunity. An exact quantification of the probability
of M&A success is difficult to define, in part because of different
measures of success.3 A magnitude estimate is that only 30%- 50% of
mergers and acquisitions will create any net shareholder value for the
acquiring company, let alone the competitive advantage expected at
the outset. Management faithfulness to the principles of sound
strategic alliances and attention to detail in execution can improve the

3
Value improvement measures for M&A transactions vary. Parameters that
contribute to variation of valuation include short-run or long-term stock
performance; accounting measures of profit or efficiency; bidder and target
valuation; market valuation, and others.
 Strategic Partnerships 21

odds considerably. The 30%-50% success check is the acid test when
contemplating partnership: The decision about entering into the
arrangement needs to be based on the down-side scenario that it has
only a 30%-50% chance of creating net value. Is the potential
strategic benefit of the deal persuasive enough to go forward in the
face of such risk, knowing the up-front and opportunity cost?

The question of opportunity and risk pulls into focus the imperative for
strategic unions: They cannot just provide a framework for modest
growth or cost savings. They must enable sustained, dramatic,
compounding growth and strategic influence for both partners,
significantly above the level that would otherwise be achieved. This is
usually the only way that the potential payback can be justified against
significant risks. Moreover, addressable opportunities for superior
growth and industry influence in M&A are the wellspring of
stimulating activities and emotional resolve within staff to successfully
operational-ize M&A.

Operational Success

The best way to create energy and enthusiasm for M&A is to

immediately form a new product, service and process roadmap for the
combined business, leveraging the assets of both enterprises. The
roadmap needs to be formed without bias or prejudice. Pre-transaction
notions of how each business competed and differentiated need to be
checked at the door coming in. The post-transaction roadmap for
products and services should be evaluated only for its impact for
employees, customers and shareholders. A compelling post-M&A
roadmap creates unique, new assets which draw heavily on the highest
value, and most strategic capabilities of the incoming units. When the
two business work to create compelling new product offerings in this
way, there is a lot for stakeholders to be excited about, making it easier
to get behind the transaction and operational-ize its potential.

Implementation capability comes down to the availability of resources.

It is relatively easy to qualitatively describe the areas of positive
interaction in a business combination. The general plan for how to
gain advantage needs to be matched with a path to integration with
mainstream operations. This is the way to give intentions force, by
22 Rapid Advance

describing who is doing what and by when, as well as coming to terms

with what other activities will assume lower priority to make room for
the high impact opportunities in the merger or acquisition. As the
people and assets increase that can be readily re-deployed to take
advantage of the opportunities in the transaction, the likelihood of
success grows. Resource freedom gives executives the power to
liberate latent value in the merger or acquisition post-transaction.

A test of conviction and ability to exploit the highest impact

opportunities in a transaction is the 20% rule. It says that in the
highest leverage area of integration, the acquirer needs to be able to
liberate 20% of the target’s capacity to pursue high impact post-
transaction opportunities. The key leverage areas are usually sales,
technology, product development or operational efficiency. Generally,
the liberated 20% of the target’s capacity is matched with at least the
same absolute level of resources from the acquirer, to collaborate with
sufficient depth on both sides of the effort, and assimilate.

The 20% rule is demanding. Few companies have 20% of any key
function underutilized. This degree of collaboration commitment tests
management’s conviction to making the deal work, and finding
opportunities in the combination worthy of setting aside pre-
transaction plans.

As the level of liberate-able resources falls below 20%, the speed and
impact of a positive contribution diminishes. Delayed impact calls
into question the merit of the deal. Slow roll-out decreases the
likelihood of success, because change left until later is much harder to
initiate than change at the outset of the combination. People
acclimatise to an expectation of little rewiring that is usually
unrealistic. Furthermore, the risk of delayed impact is compounded by
increased chance of unfavourable shifts in the competitive landscape
as the collaboration timeline extends. The 20% rule, and the implied
urgency and magnitude of integration, is one of many measures to help
assess M&A, and implement successfully.

The challenges in M&A mean that not only must one observe the
previously discussed considerations for strategic partnerships. There
are a number of elements especially important in M&A:
 Strategic Partnerships 23

• Value Levers Know and agree upon the value drivers in the merger
or acquisition. Rank them, and focus resources on the priorities.
Don’t get bogged down in low value activities.

• Feedback Systematically monitor performance achieving stated

objectives in the highest value areas, and apply corrective feedback.
Execution in the areas of highest competitive impact is everything.

• Method of Operation The method of operation for the combined

organization must be articulated in detail during negotiation and due
diligence. It is not a detail of implementation to be worked out after
the deal closes. Decide which senior executives and key staff will be
in which roles, including back-up choices for people who leave or
turn down new assignments.

• Bandwidth Matching Match the inbound and outbound bandwidth

for communication and material flow through the two organizations
as quickly as possible. For example, the customer service response
capacity for the target company whose products will be quickly
marketed through the acquirer’s larger distribution channel have to
be brought into synchronisation. Bandwidth mismatches create long
response times, slowing integration and raising apprehensions about
the acquisition’s merit.

• Integrate Quickly Integrate in 90 days. Drawing integration out

introduces more complexity than it overcomes. Leaving an acquired
business alone keeps people happy for six months at most. A
gradual transition may seem like the way to avoid rocking the boat,
but it only prolongs inevitable integration issues that become more
difficult when left until later. Few executives ever look back at a
merger or acquisition and wish they had integrated slower.
Integration should be driven with the same intensity as if the
company were failing. The need for rapid integration means cultural
due diligence is a must, to ensure compatibility and the ability to
combine quickly.
24 Rapid Advance

• Cultural Due Diligence Complete cultural due diligence

immediately after the legal closing date. Cultural investigation
usually competes with the need for confidentiality during pre-
transaction due diligence. Often, only limited data points of cultural
discovery are available until after the deal is announced. Even if a
portion of cultural investigation with staff and partners must wait
until after the deal is unveiled, there should be prompt post-
transaction investigation at multiple organizational levels and
functions of similarity and differences:

Centralized vs. decentralized decision making

Speed in making decisions (slow vs. quick)

Time horizon for decisions (short-term vs. long-term)

Level of teamwork

How conflict is managed (degree of openness and confrontation)

Entrepreneurial behaviour and risk acceptance

Process vs. results orientation

How performance is measured and valued

Focus on responsibility and accountability

Degree of horizontal co-operation (across functions, business
units and product lines)

Level of politics

Emphasis on rules, procedures, and policies

Nature of communication (openness and honesty; speed; medium
- voice, e-mail, face-to-face, documents, on-line)

Willingness to change

• Compatibility Acknowledge the consistency of cultures and

executive egos of the two separate entities. As they diverge, the
complexity, duration, and risk of integrating the two businesses grow
exponentially. The further apart they are, the tougher the early
decisions become to quickly overcome differences in strategy and
culture. Increasing size of the acquisition target also drives
integration complexity up geometrically, similarly calling for early
strong actions.

• Dedicated Team Plan for distraction of senior management during

the merge. The intensive period of integration for a substantial
merger partner lasts six months or longer. To minimize the
 Strategic Partnerships 25

unproductive disruption to each business, there must be a dedicated

integration team led by someone who is primarily focused on the
integration. The integration team needs to act quickly to smother
centrifugal forces among competing elements of the two
organizations. The team also must rapidly establish organization-
wide investment and operating policies, performance requirements,
compensation structures, employment terms, and career development
paths for executives and other key employees.

• Early Win Create at least one early win from the acquisition.
Examples of early wins include hitting a near-term revenue target,
strategic account win, or margin increase. Best of all is achieving a
business objective that neither business would have achieved alone.
An early win provides a clear signal to all stakeholders of the merit
of the acquisition. It also quells residual elements of discord down
the organizations that inevitably exists. An early win begins a
virtuous cycle supporting the merger or acquisition, as people
increasingly believe in the merit of the transaction.

• Leader Selection When choosing executives to run the acquired

business, balance the desire for organizational familiarity with the
importance of cultural consistency. One school of thought is that the
executives running the acquired business should be those with long
tenures in the target business. The argument is their familiarity and
networks will overcome all else. The other school says that long-
running executives of the acquired business will stick to old ways.
This train of thought argues that newer people are more likely to
have the right outlook for change, and a new culture. Both ideas
have merit. The best executives for an acquired business are those
who strike the best available balance. On one side of the judgement
is knowledge of the acquired organization, its industry, and
emotional capital with the employees of the acquired business to
inspire them to achieve objectives. The other side is respect for the
acquirer, willingness to change, and enthusiasm to adopt the new
culture. There is no one best extreme choice between an incumbent
and a parachuted-in head for an acquired business. The decision is
based on the factors of organizational familiarity and cultural
consistency to guide the best selection for executives to run the target
business.
26 Rapid Advance

• Retention Incentives Develop a strategy for retaining key

executives and staff. This often includes a financial retention bonus,
“stay pay,” for sticking through the merger period. This helps
employees to look beyond the intense stress during integration. The
expertise of these people is much more valuable than the technology,
products, or market access that they’ve developed. Generally, an
acquisition will struggle to succeed if they leave.

• Cultural Translation Create fluid communication and cohesion of

strategies and cultures. Modern communication technology helps
with e-mail, videoconferencing, common electronic work surfaces,
and low-cost telecommunications. But, there is no substitute for
face-to-face contact. Early in the integration process an individual is
needed who can serve as a Rosetta Stone – someone to translate the
two businesses’ processes and terminology. In smaller acquisitions,
the interpreter can be a single person with deep history and expertise
in the capabilities of the acquirer, who can act as an on-the-ground
presence at the target. In larger acquisitions, the Rosetta Stone needs
to be a multi-person team with extensive knowledge of the culture
and competitively significant advantages of both the acquirer and the
target. Whether an individual or a group, the interpreter body should
commence a development program to create the most rapid
communication between businesses, and cohesion of strategies. An
interactive development project early in the integration process
forces people to work together, understand each other, and provides
the opportunity to draw upon each others’ strengths. Because of the
intensity and complexity of communication carrying out
collaborative development programs, sustained meeting of minds is
more easily achieved with a local partner than a remote one.

• Audit Concerns Regularly audit the concerns of stakeholders.

Communication is frequently a silent victim in M&A. Limited
communication conceals problems until it is too late. The concerns
of stakeholders, especially customers, must be uncovered and acted
upon.

Customer satisfaction in the post-merger period is often one of the

most telling leading indicators of long-term M&A success.
 Strategic Partnerships 27

Customer dissatisfaction manifests itself in higher customer care

costs, pricing and profit pressure, and even revenue losses from
defections. Any of these setbacks can undermine the efficiencies and
opportunities upon which the merger was based. Tracking customer
satisfaction, maintaining a running dialog with large customers
during the post-acquisition period, and acting early upon causes of
any deterioration in customer satisfaction, all help to give the
transaction the best chances for success.

• Communicate Establish regular communication with stakeholders,

especially customers and employees. They are usually tense when a
merger or acquisition is unfolding. They all want to know what it
means for them, and how the merger or acquisition alters their
previous relationship. Start talking with stakeholders immediately
after announcing the acquisition, and repeat key messages frequently
throughout the integration process. People need to be constantly
reminded and reassured of the big picture as they face moments of
intense localised stress during periods of transformation. Weekly
updates are appropriate to communicate status, progress, and major
decisions.

• Customers Keep customers, especially key accounts, at the centre of

attention. Inform customers about how the combined organization is
protecting customers’ interests through the integration. Regularly
and consistently communicate plans and any changes in products,
service and delivery. This includes availability, ordering processes,
support, and, future collateral material. Also, make sure to get the
message out about the strategic direction for the new combined
organization so customers can share the sense of excitement and
opportunity in the transaction.

• Recognition Be generous with public recognition of those who

exemplify desired behaviour, to reinforce the strengths of the
transaction. In particular, pay attention to high output team players.
At the same time, come to terms with renegades and under-
performers that are a particular drag on M&A success.

• Best-of-Breed Practices An acquirer should adopt practices of the

acquired firm that are superior, especially if the businesses are
28 Rapid Advance

comparable in size. A best-of-breed approach retains accumulated

knowledge, which is a priority in M&A. It also shows respect for
the acquired firm. Adopting superior practices of the target helps
morale among the employees of the acquired firm. It encourages
the combined entity to adopt best practices. Furthermore, it makes
it easier for people from the two businesses to work together down
the road.

In the case where the target company bet one way on an issue, and
the acquirer another, management must handle matters carefully.
Not-Invented-Here syndrome is alive and well in technology
companies. The acquirer must make it part of the company’s
culture to assume that the acquired firm may have superior
approaches.

• Common Financial Metrics Similar measures of financial and

operational performance are a boundary condition to success, so
that strength and difficulty is viewed and communicated the same
way. Common terminology, formulae and timing of measurement
as well as reporting all contribute to unifying financial evaluation.

The bottom line in sustainable value creation is to keep objectives in

focus, and to not lose track of them in the distraction of the day-to-day
issues that can otherwise consume a merger or acquisition.

While most of the foregoing applies to all businesses, technology-

driven or not, there is an additional success factor in high-technology
M&A. In high technology, one is often acquiring pivotal technologies
in an early form – the seeds of great things yet to come, rather than the
final form. A core capability for an acquirer’s R&D becomes
qualifying, assimilating, extending and refining new technologies.
This is the way to realize burgeoning potential. The outlook of
ongoing R&D shifts towards making things better, rather than as much
attention on breakthrough innovation. This is because some of the
breakthroughs will be brought in from outside, but all technologies
must be effectively assimilated and product-ized to deliver the value of
technology M&A.
 Strategic Partnerships 29

Catalytic Technology Overlap

Where technology is to be assimilated through M&A, the degree of

innovation sought from the business combination post-transaction is a
major consideration. Technology may not be the motivator, even in
technology-based businesses. Examples of non-technical drivers
include gains in market share, market consolidation, sales force
efficiency, financial engineering, or financial opportunism. In such
cases, little new post-transaction technology is expected beyond what
the two organizations would have achieved independently. Other deals
are about breaking into entirely new markets, with target technology of
little overlap with the acquirer’s. These situations may also have
inconsequential need for technology collaboration post-transaction.

Where partial technology overlap exists, the opportunities grow for

increased technical innovation from the marriage. Where generating
increased post-transaction innovation is at a premium, the optimal
degree of overlap of the two businesses’ technologies is usually in the
range between 15% and 40%.4

Greater commonality isn’t necessarily better. Similar knowledge

beyond this range usually delivers few technology benefits. With
technology overlap greater than 40%, there is often too little
differentiation of the R&D groups for them to respect the unique
talents and perspectives of the other. The relationship frequently
becomes overly competitive, with Not-Invented-Here syndrome and
restricted information flow as the R&D groups struggle to retain
separate identities and spirits of invention. Technological
collaboration becomes stifled where overlay of capabilities is too high.
Even obvious efficiency gain opportunities through eliminating R&D
redundancy can prove difficult to realize because of territorialism in a
high imbricate scenario. Moreover, with extensive technology overlap,
even if people want to collaborate, they can’t effectively challenge
each other because their capabilities are so similar.

At the other end of the technology commonality range, white space

deals are difficult to make work. Weakly related technologies are

4
“Shopping for R&D,” Mary Kwak, MIT Sloan Management Review, Winter 2002
30 Rapid Advance

often not easy to absorb. The R&D domain knowledge, language,

tools, and challenges are too different to effectively build upon each
other. Without a reasonable amount of technology overlap, people
can’t communicate well enough or understand each other’s issues in
sufficient depth to develop world class capabilities. A moderate
degree of common ground, usually 15% to 40% of pre-transaction
skills and activities, provides optimal innovation stimulation when
grafting technologies in M&A.

R&D Team Concerns

Another technology-specific consideration in M&A is the concerns of

the R&D groups. These groups need special attention as the life-blood
of the combined entity. During an acquisition, the acquirer’s R&D
group can be distressed that the decision was made to invest in an
outside company, rather than investing in their own R&D to develop
similar capabilities or grow into the same markets. At the same time,
the target’s R&D group can be concerned about restrictions or
obligations regarding their future activities. Both concerns should be
explicitly answered.

For the acquirer’s R&D team, management should undertake a frank

dialogue to address concerns. The discussion should articulate the
need to build a market position quickly, and also include any biases of
capital markets or investors favouring acquisitions, IP issues,
imperatives about overcoming competitive barriers, and other factors
encouraging acquisitions. The discourse should continue throughout
the integration process. Management must explain and reinforce why
acquisition was a preferred and necessary route even if some elements
are uncomfortable for the acquirer’s R&D team.

To intercept apprehensions among the target’s R&D group, the scope

of future R&D activities should be clearly spelled out during the
integration process. If changes in R&D activities are going to take
place, it is better to get these out in the open. Better still is to discuss
the positives, such as capabilities and reach of the combined business
that the target business could not have attained as quickly. While
some R&D staff in the target may leave, uncertainty is worse. Clear
expectations communicated to everyone in the target’s R&D group
 Strategic Partnerships 31

reduce consternation. Transparent communication creates a positive

first impression that the acquirer is honest and forthright, for lasting
benefit.

Early-Stage Acquisitions

An M&A situation that arises frequently in high technology is a

mature business acquires an early-stage one. There are three special
considerations with this disparity that both businesses need to plan for,
in order to make the transaction a success:5

• The first is the thinness of management in most early-stage firms.

A larger corporate purchaser can end up dismayed by the amount
of resources that need to go into overdue managerial support. Start-
ups are often for sale because the present management does not
have the depth to sustain-ably grow the business to satisfy
investors.

• Second is whether the start-up is truly a business or just an exciting

technology. Businesses have a clear path to profitability, self-
sufficiency, and self-perpetuation. An interesting technology is
not enough.

• The third concern when acquiring early-stage companies is to

respect the soul of a start-up. Early stage companies have cultures
of intense spirit. Retaining core employees usually depends upon
preserving a similar culture. Starving the flame of passion and
expression is risky. Once the flame is gone, it is virtually
impossible to rekindle, and the value of the new enterprise can
sharply decline.

Acquisition success with early-stage companies increases when a

larger acquirer is fully aware of a start-up’s management depth, its
stage of development along the road to becoming a true business, and
the culture and flexibility the start-up needs to retain to succeed at
what it does and keep pivotal employees.

5
“High Tech Start Up,” John Nesheim, The Free Press, NY, 2000
32 Rapid Advance

Conflict Management

In any strategic partnership, there will be conflict. The more involved

the relationship, the greater the potential for complex disagreements.
A fast-changing technology and competitive landscape adds fuel to the
fire. As the degree of interaction in a partnership climbs, and the pace
of environmental change increases, the more defined the conflict
management process should become.

All conflict resolution has to be based on a shared decision framework,

called the reference framework. This joint frame of reference
describes how success will be measured together, the metrics to use,
and the optimizing criteria for trade-offs when tensions or exclusive
choices arise.

Certain types of conflict are to be avoided and suppressed, such as

territorialism, political gaming, and other manoeuvres not grounded in
the agreed-upon reference. Outright mistrust of a key player in the
collaboration is also something to promptly repair. However, not all
dissidence is bad.

Some rivalry in a joint effort is desirable and healthy, where the strain:

• Arises from new technologies, products, customer service delivery

methods, and business processes

• Takes advantage of the combined capabilities of both partnering

businesses, in valuable and market-focused ways

• Comes from stretching the areas of interaction in ways difficult to

do as independent companies

Conflict fitting this description is to be discovered, created and

embraced. Side-stepping such encounters are missed opportunities to
gain significant competitive advantage in a partnership.

The way to put effort into healthy tensions, while dispatching

unproductive ones, is to have a defined conflict management process.
 Strategic Partnerships 33

There are two parts to conflict resolution: 1) managing flare-ups at the

point of occurrence, and, 2) managing escalation. It is important to
have a process for addressing conflict at source, and governing
escalation. Otherwise, a vicious cycle can take hold of ever-smaller
issues being summarily referred further and further up the chain of
command of each partnering organization, undermining trust, creating
grudges, and harming execution speed.

To deal with friction at its source, have a transparent, widely-known

way that all players will deal with dissidence, and, force the discussion
to centre on statistically significant data sets, and direct experiences,
rather than anecdotes and second hand information. A method for
handling disagreements at source, as well as using facts and data, will
be much more effective than some common tonics like teamwork
training sessions, re-jigging incentive systems, or relying largely on
changing reporting lines. These measures of training, incentives and
reporting can help to deal with collaboration discord to a degree, but
they are supporting elements rather than primary success factors of
managing conflict at its origin in a partnership. A protocol for
handling disputes at source is the most important way of productively
channelling the energy of a disagreement.

Have those at the conflict source apply a common set of trade-off

criteria to the decision at hand. Often, disagreements arise because of
different priorities and interpretations of events by team players.
Productivity will slide if people debate endlessly back and forth across
the table about preferred, competing outcomes. Rather, the same
people need to have common criteria linked to the reference
framework, and apply it to the decision matter on the table. This way,
people are using the same measure of success, in the same way, and
can better invest effort in designing a creative solution to the dispute
that keeps it from being a zero sum game.

Even with common criteria for decisions in place and combined effort
to find solutions, some disagreements need to be escalated to more
senior management. When escalation happens, there should be joint
advance up the management chains in both partnering organizations.
34 Rapid Advance

Firstly, team players from both sides present disagreement together to

their bosses. A single voice helps team members clarify differences in
perspective, language, information access, and strategic objectives.
Forcing unified explanation of a mismatch often resolves difficulty on
the spot. Moreover, joint communication at escalation avoids
suspicion, surprises, and damaged personal relationships. These
negative outcomes are associated with unilateral communication and
transmission up one partnering business’ management chain, when
different messages are going up the other side’s hierarchy.

Secondly, insist that a manager in one business resolves escalated

conflicts directly with her management counterpart in the other
business. Sometimes a manager on one side or the other, receiving a
conflict from subordinates, will attempt to resolve the situation quickly
and decisively by herself. Unilateral managerial responses like this
carry significant downstream costs in a complex, interacting
partnership. Disputes need to be resolved bi-laterally, despite the
implied communication overhead.

Pair-wise management interaction across partnering organizational

boundaries can feel cumbersome. But, collaborative resolution by
managers overseeing a joint effort that has come under dispute is more
productive over the long-term. Bi-lateral conflict elevation and
resolution minimizes any sense that one side lost resolving an issue,
keeping trust high, preventing turf battles, and preserving a healthier
environment for future collaboration.

A defined conflict management method increases the likelihood of

long-term success in a strategic partnership. What sometimes gets lost
in the dynamic of making a partnership work is the disagreements
from differences in perspective, competencies, access to information
and strategic focus generate much of the value that can come from
collaboration across business boundaries. The quest for too much
harmony can obstruct teamwork and competitive advantage. When
different competencies and perspectives tackle a problem together, it
greatly increases the chances for a truly innovation solution to generate
industry-leading capabilities. Conflict is to be managed according to
articulated and communicated rules, but differences are not to be
avoided altogether.
 151

Bibliography

Strategic Partnerships

“Ally or Acquire” Roberts et al., MITSloan Management Review, Fall, 2001

“Bad Deals” Vermeulen, Wall St. Journal, Apr. 28, 2007
“Best practices in joint venture audits” Applegate, Internal Auditor, Apr.
1998
“Caution: Earnouts Ahead” Harris, CFO Magazine, June 3, 2002
“The CFO’s Perspective on Alliances” CFO Publishing Corp., May, 2004
“Choosing Equity Stakes in Technology Sourcing Relationships” Kale et al.,
California Management Review, Spring, 2004
“Collaborative Advantage: The Art of Alliances” Kanter, Harvard Business
Review, Jul.-Aug., 2004
“Little fish, big pond” Mayor, Electronic Business, Apr. 2005
“Making Acquisitions Work: Capturing Value After the Deal” Harbison et al.,
Booz Allen & Hamilton, 1999
“Managing Partner Relations in Joint Ventures” Buchel, MITSloan
Management Review, Summer, 2003
“The Office Chart That Really Counts” McGregor, BusinessWeek, Feb. 27,
2006
“Preparing for the Exit” Gulati et al, Sloan Review, Mar. 3, 2007
“The Reverse Hostage Syndrome” Welch, BusinessWeek, July 30, 2007
“Six Keys to Successful Earnouts” Metz, T.V. Metz & Co., Oct., 2006
“Using Joint Ventures to Achieve Strategic Objectives” Coallier et al,
PriceWaterhouseCoopers, 2003
“Why Companies Should Have Open Business Models” Chesbrough,
MITSloan Management Review, Winter 2007

Staffing and Culture

“The Best Place to Work Now” Morris, Fortune, Jan. 31, 2006
“How to Take the Reins at Top Speed” McGregor, BusinessWeek, Feb. 5,
2007

Market Targeting

“Assessing Risk Across an Innovation Portfolio” Day, Harvard Business

Review, Dec., 2007
“Beating the odds in market entry” Horn et al., McKinsey Quarterly, 2005 #4
“Beyond the Core” Zook, Harvard Business School Press, 2004
152 Rapid Advance

“Intel on Wheels” The Economist, Oct. 31, 1998

“Marketing Novel Technology: An Historical Lesson” Lam, Solid State
Technology, Oct., 1997

Navigating Dynamic Markets

“Fuzzy Numbers” Henry, BusinessWeek, Oct. 4, 2004

“How to Capitalize on the Downturn” Roberts, Electronic Business, April
2003
“How to Profit from a Downturn” Porter, Wall St. Journal, Nov. 12, 2001
“How Smart Businesses Adopt New Technology” Afuah, Electronics Journal,
July, 1998
“The Inevitability of Business Cycles” Korczynski, Solid State Technology,
Dec., 1996
“Strategy and the Crystal Cycle” Mathews, California Management Review,
Winter, 2005

Ecosystem Relationships

“Inside the Tornado” Moore, HarperBusiness, 1995

“The Fortune of the Commons” Economist, May 10, 2003
“Lanchester Redux” Schuler, Channel Magazine, June-July 1998
“The Many Faces of Multi-Firm Alliances” Hwang et al, California
Management Review, Spring, 1997
“Standards May Make Digital Cameras Click” Taylor, Electronic
Engineering Times, Dec. 21, 1998
“Startup” Kaplan, Penguin, 1994
“When Marketing Practices Raise Antitrust Concerns” Bush et al, MITSloan
Management Review, Summer, 2005
“The Willing Partner” Frankel, Technology Review, July 2005

Growing Sales

“Cross Selling or Cross Purposes” Harding, Harvard Business Review, July-

August, 2004
“Keeping your sales force after the merger” Bekier et al, McKinsey
Quarterly, 2002 #4
“Matthews’ Gospel” Report on Business Magazine, June 1996
“Refocusing the sales force to cross-sell” McKinsey Quarterly, Dec., 2007
“Sustaining Rapid & Profitable Growth” Jaruzelski et al, Booz Allen &
Hamilton, Nov., 1999
 153

Restructuring

“Five Frogs on a Log” Feldman et al, PriceWaterhouse Coopers, 1999

Turnarounds

“Assuming Leadership: The First 100 Days” Ducasse et al, Boston

Consulting Group, 2003
“How Lucent Lost It” Lowenstein, Technology Review, Feb. 2005
“How Symbol Got Its Mojo Back” Hempel, BusinessWeek, Mar. 12, 2007
“The Right Way to Shake Up a Company” Berfield, BusinessWeek, Feb. 12,
2007
“Saving the Business Without Losing the Company” Ghosn, Harvard
Business Review, Jan. 2002
“A year after Fiorina, Hurd makes his mark at HP” McCarthy, Globe & Mail,
Feb. 8, 2006

Divesting

“Divestiture: Strategy’s Missing Link” Dranikoff et al, Harvard Business

Review, May, 2002
“Divesting for Success” KPMG, 2002
“Hidden Value Let Loose” Morrison, BusinessWeek, Nov. 14, 2005
“Learning to let go: Making better exit decisions” Horn et al., McKinsey
Quarterly, 2006 #2
“Managing divestitures for value and liquidity” Cornwell et. Al,
PriceWaterhouseCoopers, 2005
“Venture Capital and the Finance of Innovation” Metrick, Wiley & Sons,
2007
 155

About the Author

Dave Litwiller is a senior executive in high technology, based in

Waterloo, Ontario. His background is in wireless devices, precision
electro-mechanics, semiconductors, electro-optics, MEMS, and biotech
instrumentation. He serves as an advisor for various private corporations
in matters of strategy, technology, and business development. Mr.
Litwiller is a frequent speaker at technology start-up forums and
executive conferences on business strategy.

http://www.amazon.com/Rapid-Advance-Acquisitions-Partnerships-
Restructurings/dp/1439200874/ref=sr_1_1?ie=UTF8&s=books&qid=1
290538186&sr=1-1