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

v

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

vi

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

vii

Bibliography 151

About the Author 155

ix

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.

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

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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.

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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

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153

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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.

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