Friday’s Exit Strategy: How Pigs May Get Slaughtered in M&A
When Amy Katz and I started building businesses together in 2008, we often talked about pending customer relationships, expected revenues and the associated profit margins.
Amy built our business model and ran the company (sales, finance, marketing, etc.). I focused mainly on our IT media platforms and content. But she always looped me in on the “dollars and cents” of our business, and sometimes she’d use me as a sounding board for new sponsorship models.
Startup Mode: Bulls, Bears… and Pigs
At some point in that business journey together, I embraced a common phrase from Wall Street: “Bulls and bears get rich. Pigs get slaughtered.”
Poke around on the web and you may find the term displayed slightly differently, something like: “Bulls Make Money, Bears Make Money, Pigs Get Slaughtered.”
As the Motley Fool puts it:
“A bull tends to charge with its horns thrusting upward into the air, whereas a bear tends to swipe its paws downward to attack. These two distinct styles are metaphors for market activity on a whole. If the market has a positive outlook, it’s considered a bull market. By contrast, if the market has a negative outlook, it’s considered a bear market.”
Either way, patient investors can make money in a bull or bear market — yes, you can make money in bear markets. What about the pigs? They tend to get slaughtered either way. Again, as Motley Fool puts it:
“Pigs are investors whose goal is to make the most amount of money in the shortest amount of time. Piggish investors are known to either take on high degrees of risk or overlook risk in order to make a profit. They often make rash investment decisions and buy stocks without doing their proper due diligence. As a result, they tend to lose money, hence the adage that they inevitably get slaughtered.”
Fortunately, Amy and I have similar business DNA and risk tolerance. In our own households, we tend to live below our financial means. In business, Amy doesn’t chase every customer dollar. Instead, she focuses on building long-term relationships. That mindset has always treated us well.
Mergers, Acquisitions: Bulls, Bears and Pigs
A steady, rational long-term view is incredibly valuable when you’re building a business — and when you’re mulling a potential exit from that business.
Two quick examples: In 2010, roughly two years after launching our first business together, Amy received an unsolicited inquiry from a potential buyer. Yup, another media company wanted to buy us. The negotiations on both sides of the table actually went quite well.
- We were bullish about our business.
- The potential buyer also was bullish about our business.
- Everyone at the negotiating table ultimately agreed on a potential valuation. In other words, there were no pigs in the room. The potential buyer wasn’t asking us to hit unreasonable earnout targets. And we weren’t asking for an unreasonable overall valuation.
Still, that deal didn’t come to fruition. The buyer was mulling some financing to cover the buyout, which put some of the earnout payments at risk. So we respectfully declined to move forward.
We learned quite a bit from those negotiations. And by 2011, we discussed M&A deals with several other media companies, and ultimately sold the business to a New York giant that was looking to shift from legacy print to digital services.
Amy and I stuck around with those new owners for a few years, then took some time off and re-emerged with our current company (After Nines Inc.) in late 2014. Under that banner we launched ChannelE2E (2015) and MSSP Alert (2017).
Mergers & Acquisitions 2018: Beware the Pigs
Fast forward to present day. Here at ChannelE2E, we’re closely tracking the M&A feeding frenzy involving VARs, MSPs and CSPs.
Private Equity firms are scouring the market for MSPs that have $20 million (or more) in revenues and 20 percent (or more) profit margins. You know the punch line: Those PE firms can’t find MSPs with those metrics. So, smaller MSPs are buying each other up in a mad scramble to achieve the scale that PE firms want.
My advice? Proceed with caution. Think like a long-term bull or bear. You should negotiate hard to get every last dollar that you deserve. But: Avoid the temptation to become a pig in search of fast money.
In a successful M&A deal, both the buyer and seller should feel at least some discomfort, according to Service Leadership Inc. CEO Paul Dippell. His meaning: Both sides of the table need to give a little during the negotiating process to truly get what they want — a successful M&A deal.
Frankly, I’m a little nervous about the current M&A landscape. In some cases, PE firms are throwing money at MSPs because private equity firms need to invest those dollars. In other cases, MSPs are agreeing to M&A exits at high valuations on paper — but ultimately losing out because the earn-out terms are far too aggressive for MSPs to fulfill.
Long live bulls and bears. And the pigs? I suspect quite a few are heading toward the slaughter…
Joe Panettieri (@JoePanettieri) is co-founder and executive VP of After Nines Inc. and its IT media platforms — ChannelE2E and MSSP Alert. His great grandfather arrived to the United States from Italy around 1917, charting the way for three generations of entrepreneurs.