Build or buy? Once tech companies are big enough to afford acquisitions, sometimes the best way to fill a gap in their product roadmap is to buy a startup with a ready-made solution. However, caution is warranted: finance scholars have shown — repeatedly and quite conclusively — that the average economic payoff from mergers is negative. Buyers tend to overpay because they often overestimate synergies from acquisitions. Indeed, the tech landscape is littered with failed acquisitions, such as Yahoo’s of Tumblr, Microsoft’s of aQuantive, and Zynga’s of OMGPOP.

Be brutally honest about the reasons behind pursuing an acquisition

We’ll focus here on ways in which a product leader can boost an acquisition’s odds of success.  Of course, getting value from an acquisition also requires lots of smart decisions that are outside of the product leader’s purview, most notably, how much to pay and how to structure employment contracts to retain talent.

Why?

Intuit co-founder and Executive Chairman Scott Cook asserts that extreme clarity about the reason for the acquisition is paramount to its eventual success, because it will determine whether, when, and how to integrate the acquired company.  

Some startups are purchased solely for their talent and/or IP; their product is shut down soon after the deal is closed. Others have described best practices for managing an acquihire, including Mike Brown, Will Larson, Philippe Botteri, and Michael Schrage. We won’t address the topic here, other than to say it takes candor with the talent being acquired and skillful management of this talent to realize a good return from an acquihire.

We’ll focus instead on acquisitions that are intended to improve a product or broaden a company’s product line. As examples, consider acquisitions made by TripAdvisor over the past 15 years. Adam Medros, TripAdvisor’s former SVP-Product and now COO of Embark Veterinary, described four phases in TripAdvisor’s strategy for acquiring startups.

In the first phase, the motivation was “click arbitrage”: TripAdvisor could monetize a smaller startup’s traffic at roughly three times the per user rate they previously were earning.After this arbitrage opportunity closed, TripAdvisor targeted new audiences that could be attracted by acquiring and integrating new product types, for example, Cruise Critic.In a third phase, TripAdvisor pursued acquisitions that built product development capability, enabling teams in the core business to experiment and build faster. One such acquisition was photo centric; another, EveryTrail, brought mobile app development expertise.A fourth phase entailed larger acquisitions that broadened TripAdvisor’s product line, for example, FlipKey (vacation rentals) and Viator (tours and activities).

Other tech companies share these motivations for their acquisitions — and they often follow a  sequence similar to TripAdvisor’s as they mature.

There are additional objectives behind tech company acquisitions. For example, when Deep was SVP-Products at LinkedIn, they acquired SlideShare and Pulse as part of a strategy to provide content that would engage LinkedIn users and encourage them to return daily, instead of only when searching for a job.

What scholars call “economies of scope”—adding product lines to leverage a parent company’s assets—provides another rationale for mergers. LinkedIn’s acquisition of Lynda.com is a case in point: it gave LinkedIn sales reps who already called on corporate HR departments one more thing to sell.

Acquisitions can likewise speed a company’s entry into overseas markets. That’s an especially risky path, because it combines the perils of international expansion, which we described in another post (link here), with the many challenges of integrating an acquired company. Some spectacular examples of flameouts were eBay and Amazon’s acquisitions of EachNet and Joyo, respectively, to facilitate their market entry into China. In both cases, the US acquirer sought to use the local target as a vehicle to bring their US product into the Chinese market, seemingly oblivious to the fact that the Chinese market and the Chinese consumer were quite different from their US counterparts. In Jack Ma’s words, “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose, but if we fight in the river, we win.” China was the river.

Finally, motivations for mergers can be self-serving or even nefarious. CEOs under pressure from investors to make a big move often turn to M&A markets. And tech giants are sometimes accused of pursuing an “embrace, extend, and extinguish” strategy with acquisitions, to remove a promising upstart from the playing field — or keep it out of a rival’s hands.

The key point: there are lots of reasons to acquire companies. And each one brings a different set of integration issues. That’s why Scott Cook counsels executives to be crystal clear on their motivations for a merger.

Below, we’ll explore the challenge of post-merger integration. But first, we’ll consider ways that product leaders can manage the diligence process, before signing a purchase agreement, in ways that boost the subsequent odds of success for an acquisition.

Diligence

Selina Tobaccowala, Chief Digital Officer at OpenFit and formerly President & CTO at SurveyMonkey and SVP-Product at TicketMaster, shared advice on how product leaders should diligence an acquisition candidate.

According to Selina, it’s crucial for a product leader to get to know the senior leadership of the target company really well—especially the venture’s founder/CEO. What motivates them, and how does an acquisition square with these motivations?

• Will strong loyalty to their team cause problems if the team is dispersed?
• Are they disdainful of bureaucratic processes — like so many founders — and if so, will that hasten their departure if they are subjected to your HR department’s scrutiny of hiring practices, your legal department’s insistence on contract reviews, etc.?
• Do they simply love the early stages of launching a new venture — like so many founders — and if so, can they find outlets for that passion in your company?
• Are they burnt out, or eager to cash out? If so, will their head be in the game if they join your team?
• Most importantly, how strongly wedded are they to their product vision? If post-merger integration entails shifts in product strategy, will they be resistant?

Selina suggests meeting as many of the target company’s managers as possible. The target’s CEO will typically be wary of providing broad access, due to concerns about confidentiality and to avoid distracting their team. But a startup’s leaders set its culture, and cultural fit is key to integration success: it boosts team members’ motivation and promotes retention. Consequently, if you get to know the target’s leaders well, you’ll learn a lot about the potential fit of the managers who report to them.

Selina also suggests spending a great deal of time during diligence understanding the target’s data, with an emphasis on operating performance. It can be challenging to make sense of the data, because, as she points out, “Senior managers always understand their data better than you will, and they can spin the data to tell any story they want. For example, when you dig deep on retention rates, you’ll hear from them, ‘Oh, we were referencing churn of activated users. We didn’t realize you were interested in all registered users.’”

Technical diligence is another key task. If you might keep the infrastructure they assembled, will that infrastructure support a big boost in traffic? Are there single points of potential failure, in particular, dependence on third parties? How much technical debt has the target accrued, and what processes – if any – have been in place to limit and pay down the debt? What about open source licenses? Will you run into any IP challenges that startups may avoid?

Selina strongly recommends formulating a post-merger integration plan upfront, before closing the deal, with the close involvement of the target’s leaders. This is the best way to avoid future surprises and conflict over a broad range of issues, including:

• Shifts in product strategy
• Reporting relationships
• Which target company technologies will be retained, and which will be replaced with the acquirer’s
• Whether the target’s team will be kept intact
• Which of the target’s functions will be eliminated
• Who from the target’s team will be retained
• If kept intact, whether the target’s team will have autonomy vis-a-vis corporate HR, legal, and other staff departments
• If kept intact, whether the target’s team will be allowed to continue using the product development systems and processes they previously relied upon, e.g., for bug tracking, sprint planning, roadmapping, etc.

The ideal product of this dialogue is a 100-day plan for post-merger integration. Compensation incentives for responsible parties can be tied to the plan’s implementation .

Negotiating an integration plan before signing a purchase agreement takes more time, but time should be available if there aren’t multiple suitors creating pressure. The target’s founders are not likely to resist the idea of formulating an integration plan upfront. For most founders, this will be the biggest business decision of their life, and they want it to go well. In particular, they will want to know how their team will be treated.

While the target’s leaders should be copacetic, members of your own Corporate Development team may resist the idea of negotiating the integration plan upfront. They may fear that seeing the devil in the details will scare off the target, or that the extra time involved will raise the risk of unforeseen developments that can derail the deal. But a savvy product leader will push back, knowing that a broken deal would be a better outcome than an acquisition that fails due to the seller’s misunderstanding of the buyer’s motivations and plans.

Integration: Pull or Push?

Scott Cook, Steve Kaufer, and Mark Pincus — the founders of Intuit, TripAdvisor, and Zynga, respectively — have each overseen lots of acquisitions. They all told us that they’d had their share of big successes and big failures with mergers, and they all have reached the same conclusion about how to boost acquisition success odds: pull, don’t push. Meaning: let the leadership of the acquired company make most of the decisions about what should stay separate, and what should be integrated with the new parent. Let them pull appealing policies, technology, and people from the parent, instead of having the parent pushing for adoption.

Encourage pull, and resist push.

Steve Kaufer summarized the approach: “We won’t force tools and processes on acquired teams. Instead, we systematically expose them to practices in our core business and let them decide what to adopt.” Steve acknowledged some potential downside with the pull approach: “You might fail to integrate some engineering basics, like using common programming languages, because every engineer has their favorites. You need a CTO who’ll say, ‘10% needs to be done this way.’”

Scott Cook explained, “Acquired companies are not homogeneous, but corporate “Integration Departments” typically treat all acquisitions with a ‘one size fits all’ integration approach.  ‘Integration’ typically means functional execs from the parent arrive saying ‘We are here to help.’ But it becomes clear that they mean ‘My way or the highway.’  This is entirely natural. Functional execs have spent years enforcing their policies; they are convinced there’s one ‘right way’ to do things.  Any diversion from ‘their way’ diminishes their authority, so doing things their way is the only way they allow.  Where the acquired unit is badly run, this can be necessary and valuable.  But where the acquired unit is well run, this crushes the spirit of the acquired team.”

Scott described Intuit’s 2020 acquisition of Credit Karma, a superbly run and highly successful organization.  Intuit’s top management gave a directive: Impose nothing. Integrate only data and security. Let Credit Karma management decide what else, if anything, they wish to adopt from Intuit. Scott explained that he came to appreciate this approach by observing Microsoft’s successful acquisition of LinkedIn. He added, “We changed our language. Instead of integrating Credit Karma, we are accelerating Credit Karma’s success.”

Mark Pincus commented, “It’s important that the parent company’s leadership conveys humility and curiosity toward the acquired company. That way, they’ll know what they do is viewed with reverence and admiration. They’ll be more excited about joining us and then sharing the best of what they do. When an acquisition works well, they are adding to and regenerating our DNA.”

While the pull approach boosts success odds for an acquisition, product leaders should recognize that the level of autonomy given to the acquired team may generate resentment within the core business. This potential backlash makes it all the more important that the acquisition has ongoing senior executive sponsorship. This should be baked into the responsible executive’s OKRs for at least 18 months. In addition to an executive sponsor, some tech companies designate a “corporate concierge” who helps the acquired team members get access to parent company resources and helps them navigate new corporate processes.

Adam Medros provided senior sponsorship and spent lots of time with the companies that TripAdvisor acquired when he was SVP-Product there. He elaborated on Trip’s “pull” approach to integrating acquisitions.  Medros had observed a mistake they made with an early acquisition: each member of the acquired company’s five person team had been assigned to their corresponding function within TripAdvisor—at the insistence of Trip’s function heads. The new employees felt disconnected, and within six months all had departed.

With subsequent acquisitions, Medros resolved to keep the teams together and told them, “I’m here to protect you. I want you to break rules and to infuse your culture, ideas, and skills into our mothership.” He moved some TripAdvisor managers into the acquired units to encourage cross-fertilization, but not into leadership roles. Medros recalls, “We acquired EveryTrail. They were using Jira and they thought Trip’s home-grown bug tracking system was dumb. Before long, all of Trip’s product teams started using Jira.

An important mechanism for promoting “pull” at TripAdvisor was the company-wide product review meeting, which was held every Thursday from 10:30 until noon, and open to any employee. Medros explained that the meeting’s purpose was not the approval of new products and features. Rather, the goal was to provide peer review and feedback, and to build awareness of new products across the company. The meeting was a great way for acquired teams to get exposure, and for them to inject their ideas into the organization. Medros added that the meeting helped to set norms and to acculturate new arrivals, because it showed them how decisions were made – and not made – at TripAdvisor.

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There you have it: for tech companies, one path to successful acquisitions involves more “you pull” than “me push.” Adding strong pull to the very natural corporate impulse to push can create a dazzling entity, in the spirit of Dr. Doolittle’s pushmi-pullyu. As the good Doctor sang:

Pushmi-Pulyus are remarkable creatures.
Of all God’s animals, they’re the cleverest!
They develop these remarkable features
Running up and down Mount Everest!

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