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The Process Structure of M&A

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Broken down to the basics, the process structure of M&A typically follows a highly selective search for acquisition targets, a negotiation and due diligence process, followed by its financing and closing. Thus, the admission is very competitive among startups. Acquired startups are typically being supported in their future growth phase, with the aim of being successfully integrated, eventually. M&A in large corporations is normally anchored as a loosely coupled, rather large M&A function or as a business-unit led M&A function, typically on-site and under a very high level of corporate control. (Schalast, 2016)

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Culture has emerged as one of the most significant barriers to successful integrations, because companies with different corporate cultures find it difficult to make right decisions, or to operate effectively, when merged. To address this issue, culture should be made a major component of a formal change management work stream. Thereby, it is important to manage both organizational and HR aspects (Kelly & Ma, 2016; Owyang & Szymanski, 2017; Dixon, 2005).

Either run as a subsidiary through an acquisition or as a newly merged company, resources are typically consolidated, resulting in synergy effects (e.g. consolidation of unique capabilities, expertise and HR, financial and physical capital, combination of market share) (Interviewee A, personal communication, August 28, 2017). Accordingly, M&A requires an excellent change management and thus people-, leadership- and negotiation skills (Dixon, 2005). Thus, the support level in this case is considered very high.

The performance of M&As is typically measured by the synergies achieved (in the case of startup M&As often related to revenue, arising from expanding into new markets, exploiting new sales channels, and leveraging new products, innovations, and brands), if they are clearly defined and articulated in advance. Further common KPIs for M&As are the IRR or ROI. (Hodgson & Haas, 2013) The ecosystem of M&A typically includes law firms, investment banks, advisors and consultants to support the process. Recent evidence shows that M&A of startups is a common practice within the technology industry. In specific, Google, Yahoo, Facebook or Oracle count to the top 10 buyers of IT companies since 2010 (Bonzom & Netessine, 2016, p.21).

Procurement (Outside-In)

In general literature, procurement refers to the management of supplying a corporation with strategic and operational resources from external sources (van Weele & Essig, 2017). In the future, procurement is hypothesized to expand its traditional focus of a mere supply-management to co-developing with suppliers, which includes idea-sourcing and thus significantly affects the corporates’ innovation performance (Umbenhauer & Sopher, 2013; Taga, Pichai & Doemer, 2015; Batran, Erben, Schulz & Sperl, 2017)

Procurement’s strategic objective is to co-develop new approaches to specific business problems or opportunities to challenges quick and at a relatively low cost (Mocker et al. 2015). With a short-term integration of innovative suppliers to the company’s product development process (Batran et al., 2017, p.21) procurement particularly pursues access to disruptive technologies and new business models (future business). Innovations from suppliers may be sold-to (for example to a corporation itself) or sold-through (for example to a corporation’s customers base, with the corporation as a partner of the supplier). While sell-to procurement aims at direct internal improvements (in the self-interest of the company), the goal of sell-through is to make commission from resales and to profit from synergy effects in the existing portfolio (Interviewee E, personal communication, September 29, 2017). Commissions from sell-through products are the major financial revenue source of procurement. Prevailing cost drivers are reported as HR costs, operational- and transaction costs in the sense of search-costs, time-investments, persuasive efforts for internal approvals, or the assessment of infrastructural compatibilities (Interviewee E, personal communication, September 29, 2017). Both the investments necessary and the risk of procurement have been identified to be on a low level (Mocker et al., 2015).

Large corporations preferably procure with a small scale of small, early-late startups with already existing, marketable and adaptable high-quality products / services. Within the co-developing process, a POC is typically devised within one to two months, however this process may take up to three years (Interviewee E, personal communication, September 29, 2017).

Regarding the structure of collaboration, there are two typical practices on how potential procurement startups may be approached. Startups may either openly apply to a given range of a corporate’s interest fields (Interviewee E, personal communication, September 29, 2017) or via a more strategic and demand-led approach, following the steps of project initiation, supplier qualification, evaluation and shortlisting and contract negotiation (Mocker et al., 2015, p.29). While a procurement team is typically organized as an on-site subordinate to a corporate innovation unit, it is inevitable for the procurement team to also closely work with the purchasing department to act as a mediator (Mocker et al., p.30).

The close teamwork between different units enables fluent transitions not only among the units, but also between the startups and the corporate units. This is further supported by members of the procurement team who have an entrepreneurial background and thus acts as a cultural intermediary, offering pragmatic solutions to the startups (Mocker et al., 2015; Bartran, Erben, Schulz & Sperl, 2017, p.169 seq., Umbenhauer & Sopher, 2013, p.14).

Physical resources are typically not offered, since most startups involved in procurement already have their own office spaces set up whence collaborating with the corporation. Business assistance is given especially when it comes to the development of a POC, including the integration of new products into the corporation’s processes and systems. Intense support and internal knowledge is an inevitable resource to make the external solution run within the corporate context (Interviewee E, personal communication, September 29, 2017). Not only the access to resources from within the corporate, but also the access to its network enables startups to scale up, to convey essential validation for future customer acquisition and get the credibility to convince other corporates to work with it (de la Tour et al., 2016).

The performance indicators of procurement programs highly depend on the project. For sell-through products, revenue metrics such as sales revenue shares are common (de la Tour et al., 2016). Umbenhauer & Sopher (2013) predict that in the future, procurement will broadly be aligned with shareholder metrics (e.g. EBITDA, RONA or ROIC POCs, new customer acquisitions or new innovation fields explored).

Corporations that practice procurement contribute to their ecosystem by bridging startups to its customers. Concerning typical procurement industries, Umbenhauer & Sopher (2013) draw our attention to retail and high-tech sectors. However, the practice is predicted to become more common among more industries in the near future (Umbenhauer & Sopher, 2013, p.10; Schulz & Sperl, 2017).

Business Incubator (Outside-In)

A business incubator (further referred to as BI) is a company-supported (on-site or off-site) office space that ’hatches’ new, typically customer-centric ideas with the long-term oriented strategic goal of developing new business models from scratch (Robinson & Stubberud, 2014; Interviewee B, personal communication, August 29, 2017). The corporates’ enhanced business portfolio may enable an improved access to professional services, capital or new markets (van Weele, van Rijnsoever & Nauta, 2017).

For-profit BI focus on financial returns through fees from rent (Cohen, 2013) or further business support services provided to startups (Kim & Wagman, 2012, p.2) as well as an equity share based on royalty agreements on the startups’ success (Gassmann & Enkel, 2006; Robinson & Stubberud, 2014). HR- and facility costs are key cost drivers of BIs. Both the investment- and risk level of BI is considered to be on a medium level (Bonzom & Natessine, 2017).

BIs mainly focus on medium to large early/seed startups with a strong tech - and customer-focus (Bruneel et al., 2012), aiming at graduating them within a typical length of three to five years of continual exposure to the incubation environment (Dee, Gill, Livesey & Minshall, 2011; Weiblen & Chesbrough, 2015; Hackett & Dilts, 2004; Ringel et al., 2016; Cohen, 2013).

The structure of a BI’s selection process is typically open and non-competitive (Hathaway, 2016; Cohen, 2013), however startup companies usually are required to apply to ensure that they meet the demands of the incubator’s admission-criteria or mission (industry, stage of company, founder demographics, etc.) (InBIA, 2017). BI accept and graduate startups ventures on an ongoing basis (Cohen, 2013) and support them through all growth phases, especially in the development of a MVP based on the evaluation of valued customer features by engaging with early adopters (Interviewee B, personal communication, August 29, 2017), disruptive products, long-term partnerships with the startup or its acquisition.

A great challenge of BIs is to provide startups with an culture and environment, in which radical innovation can happen which is typically very different from the environment of a corporate parent. The risk of overprotection through corporate backing or close ties to the mother corporation might prevent the startups from pursuing partnerships with their parent’s competitors or from developing competing products that might disrupt the corporate backer (Weiblen & Chesbough, 2015). Interviewee B (personal communication, August 29, 2017) strongly suggests holding a portfolio manager accountable for facilitating early market exposure, the general pivoting of the startup and with this, its shielding from corporate complexity.

Several researchers repeatedly emphasized on a BIs vital necessity of high quality resources and their alignment to priorly identified startup needs, as well as the startups’ active use of such resources (van Weele et al., 2017; Robinson & Stubberud, 2014). Of special significance for startups to join a BI is the access to tangible resources (i.e. physical capital and financial capital). Business knowledge (developed through training, coaching or networking opportunities within the startup ecosystem), is the incubator’s most valuable resource within the collaboration process (Bruneel et al., 2012; Mian, Lamine & Fayolle, 2016, Sullivan and Marvel, 2011). Further important access to resources is supported by social networks, established through the IB’s mediation services Robinson & Stubberud, 2014; Sá & Lee 2012, Borgatti and Foster, 2003; van Weele et al., 2017, Lewis, 2001 p.14). The external collaboration with customers in the startup's product development requires full attention from the corporate management and access to appropriate capabilities (McGrath & O'Toole, 2013, Zhu, Hong & Liang, 2014; Sá & Lee 2012). Also, a so called “traction control function” which is responsible for setting and assessing the right metrics for customer adoption is beneficial to the success of BI programs (Interviewee B, personal communication, August 29, 2017).

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