By Chris Desautelle is CFO of Columbia-based Metastorm (Published March 8, 2004)

Growth, measured by revenue, the number of customers and staff, or other factors is a necessary part of corporate life. Companies that don’t grow tend to struggle as budgets are reduced, product or service offerings are cut back, and even layoffs occur. Technology companies are especially prone to this principle because of the aggravatingly short life cycles for technology products.

Why merge?

Merging with or acquiring other firms allows the purchaser to quickly get established in other markets and maintain its growth curve. Except for giants like Microsoft, too much time and too many resources are needed to develop a technology and take it to market by yourself in a relevant timeframe.

As a result, growth requires companies to be broken up and sold in order to create new companies that compete more effectively. The new entity then has an influx of technology, but also more size, economy of scale, and the ability to get products to market faster.

What can companies do to maximize their growth potential through a merger and/or acquisition (M&A) strategy? Start with the following checklist of considerations.

Know and Live Your Strategy

You may not know that market dominance is what you want when you grow up, but you need to have a vision that gets you to the next stage. For example, focus on select vertical markets before striving for overall market leadership.

Once the vision is crystallized, it’s time to evaluate what you lack in your strategy to reach that next stage. Is it certain types of customers, such as government or manufacturers? A geographic presence in a certain market? A different type of technology? Knowing the answers to these questions will put you in a solid position to research and reach out to the companies that are suitable for M&A.

When looking at M&A prospects, think about what they would provide you in light of current business trends. For example, if sales are trending down in a growth market, the prospect’s technology may be outmoded and you don’t want it. But if your reason for buying the company is instant access to a new market, it may make sense because you would discard the old technology anyway. With this mindset, you will be a strategic buyer who is building long-term value, not just a financial buyer looking for a bargain.

Investigate the Prospects

After you have selected a candidate and sent the letter of intent to acquire or merge, count on spending most of your time going over every part of the company to get an accurate assessment of its value and long-term potential. Ask who the company’s customers are, and what stage of the sales cycle is most important to them (purchase, use, service of maintenance). Also find out exactly why they purchase the product or service (productivity, performance, easy to deploy, risk mitigation).

Look at the pricing of the product or service. Where does it fall within the range for the industry, and how close is it to the median? A related consideration here is whether there are substitute products or services and if their lower prices are a threat, but if the M&A target’s usefulness is exceptionally broad then pricing may not be an issue; buyers will pay what the market will bear.

And, there is a flipside to this: is the company meeting its costs based on current pricing and revenue?

Also determine if the target’s sales model is compatible with yours. Can you integrate their direct model or channel-based one? How is channel conflict avoided? What about the sales contracts – are they committing you to something on which you can’t deliver?

And let’s not forget the staff – are they meeting expectations? What are they saying about their employer? In what areas could there be reductions because of redundancies? Are the two corporate cultures compatible?

If you are considering M&A of a company in another country, additional criteria need to be weighed such as political stability, the regulatory climate, the ability for you to bring profits back home, and language barriers.

Ideally, these questions are asked before the comprehensive analysis of cash flow and earnings because the answers can help you shape an assessment of the business that the numbers may not tell. Of course, cash flow and projected earnings are critical indicators of valuation, and these metrics should be compared to those of other industry players (either publicly traded competitors or private firms that underwent similar M&A transactions).

Communication Before Integration

Communicating the new business plan to all C-level executives on the newly designed organizational chart is essential because all of them are needed for implementation. The sales team in particular will have the fresh challenge of optimizing the selling model so that the company can take advantage of the combined offering. Perhaps you can increase the price because of added functionality, or maximize the “pull through” – selling more of one product because you can package it with the second, complementary product.

In other areas there will be some redundancies to eliminate, and you will commit resources to merging the companies legally, liquidating some assets and closing offices, and combining information technology (IT) networks. Other items on the To Do list will be merging payroll systems, evaluating and finalizing expense policies, and determining the best way to unite the accounting, human resources and other systems. In the long run, communicating the vision and following the strategic approach outlined above will make implementation easier.

M&A or the Highway

The technology community continues to be caught in a state of creative destruction. Companies have to acquire others with technology or merge with them in order to get products to market in time for customers to buy them; otherwise, those products will be overtaken by newer-generation products.

Companies that want to be acquired need to be focused on this, too, by establishing alliances with potential suitors and becoming an integral part of their strategy. M&A is here to stay, and it must be an exit strategy for all but the largest companies. It’s one of the most optimal ways to maximize shareholder value.

Chris Desautelle is CFO of Columbia-based Metastorm, a provider of business process management (BPM) software. Contact him at cdesautelle@metastorm.com.