Wednesday, August 08, 2007

Sourcing Deals

In general, I think it easier to find deals as a strategic acquiror than it is when looking for investment opportunities in the VC or PE worlds. First, the universe of potential targets is a lot smaller, unless you work for General Electric. Secondly, although your financial models may not adequately account for this factor, there is, at some level of the corporate decision-making process, a built-in "strategic bias" favoring deals that help grow the business.

Assuming you're not operating within a global conglomerate or looking to expand inorganically into a new line of business, potential targets are going to be found primarily amongst your competitors and suppliers. For example, in the wireless industry we would do deals to acquire operating markets or raw spectrum from other carriers (competitors), acquire or sell towers to or from aggregators (suppliers), and acquire companies providing billing and other IT services (suppliers). In addition, there would be the occasional deal with a financial entity (speculators) to acquire spectrum assets, or a small company with something new and exciting to offer that wasn't currently a vendor (innovators).

In at least the first two groups, you should know who the potential targets are, at least for the most part. You probably already talk regularly with some of them. Others you may cold-call to get a discussion started, or they may hire bankers to approach you. Or your CEO might come back from a two-week camping trip with a deal in hand. In any event, deals with those categories of targets are not hard to get going.

Of the other two groups, the speculators are the easiest to locate - they will usually find you. The innovators are the tough ones to find. While this category may be of lesser importance in stable, slower-growing businesses, it's critical in many technology businesses to find and acquire these talents and ideas before the competition does. The problem of finding them could stem from not knowing where they might be, not knowing how to get your inquiries returned, or not being able to efficiently filter out the few good opportunities from the flood of dreck that is being thrown on your desk every day (an issue Google no doubt struggles with). More than ever, overcoming these issues requires those doing the deals to know as much as humanly possible about their company and the environment it operates in.

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