The founders received a message that right now the ground is slipping from under their feet. What to do with it is the question. Already, teams are planning to cut their spending to save capital. For the same purpose, they carry out painful reductions in staff or impose a moratorium on hiring.
But they also need to think a lot harder about building relationships with bankers and larger companies that might be interested, say two lawyers who work on both the buy and sell sides of big companies and new startups alike. and both have over 20 years of experience.
Indeed, to better understand some of the options the founders may have, we spoke earlier today with Denny Kwon and Scott Anthony, both of whom represent the law firm Covington & Burling (where former U.S. Attorney General Eric Holder is also an attorney, among other prominent lawyers ). They answered a number of questions that we thought startups might be interested in right now. Our chat has been slightly edited for length.
TC: How much has the world changed in the last few weeks?
DK: There is definitely more pressure on sellers to get trades as quickly as possible in light of the fact that there is a lot of volatility in the market right now and they don’t know how buyers might react to a significant price drop. the price of their shares. Smaller companies also face the prospect of a slightly more difficult fundraising market, so the alternatives for them are narrowing down.
TK: Given that public shares are so volatile right now, are buyers more or less inclined to offer shares as part of a deal?
DK: In this market, it is much more difficult to determine the price of transactions with a significant share of shares. With any volatility, you don’t get a clear idea of the stock’s inherent value, so all-cash trades are much more favorable to the target.
TC: Are the targets able to make demands right now? What leverage does a startup with shrinking opportunities actually have?
DK: Whenever we see volatile markets where the valuations were incredibly high. [and are] are reset, it always takes time for sellers’ expectations to reset as well, so while they may be temporary [lull in activity] due to the market, if a “normalization” occurs, we are likely to see M&A activity, especially where valuation expectations are lowered by both the buyer and the seller.
my meaning [right now] is that buyers may view the market correction as potentially opportunistic, but sellers may not have the same expectations as they may hope for a rebound in the near future. Once sellers’ expectations drop and they continue to hear from VCs that funding may not be as available as it was 6-12 months ago, it will be even harder for them to turn down incoming acquisition offers.
TC: Do you see deals falling apart as buyers want to reprice previous deals in their favor?
DK: The pending deals I’m working on are ongoing.
TK: We’ve all been hearing – and reading – about very sharp drops in value. Do you have an idea of how much value your customers have lost in recent weeks, or if some sectors have been hit harder than others?
S.A.: Of course, there is evaluation pressure, but it is difficult to measure. Of course, we have companies that are rushing to close valuations. [before Russia invaded Ukraine] and [that period since] changed all expectations. I think the company is worried that investors are sitting around and that is driving down its value.
Companies with earnings and good prospects will weather any downturn better – it always has been. Depending on the sector, this will depend, but the entire stablecoin [debacle] did not help cryptography.
TC: How much concern do the antitrust authorities have for your large clients?
DK: This is important for all practitioners, but there is a dichotomy in that some transactions are recordable and others are not. For those who are subject to registration – the threshold is approximately $100 million – we spend an incredible amount of time analyzing potential regulatory issues.
TK: How long does the M&A process take, and at what point do both parties agree on a price?
DK: In the initial buyer approach, the time frame can vary from a few weeks if the negotiation happens all at once, to several months if the target company wants to know if there is another interest. Much depends on how persuasive the first sentence may seem. Once you get to the appraisal handshake, it usually takes six to eight weeks to get the final agreement signed.
SA: If [startup] it’s the one who decides to find a buyer, then the process – maybe they hire bankers, maybe they use the connections of the board members to reach strategic goals – the process and timing can vary greatly depending on how quickly they need money and how quickly they can interest potential buyers. . . and company size, but buyers will still have their own checks.
TK: Let’s assume that M&A will be a bigger factor given the chilly funding environment. If you had to advise a startup on the pros and cons of continuing, what points would you make?
DK: Many companies at a tipping point that need to raise money to finance their growth or expansion face a difficult decision: either raise a new round when the valuation may fall short of their expectations, or [where they see a lot of dilution]or exiting M&A when they see revenue now but lose [potential] upside down.
TK: Should startups that are open for sale apply to anyone, or should they wait to see who approaches them? Some may fear that the value of their startup will drop as soon as they show a willingness to sell.
DK: I would advise startups to talk to bankers and keep in touch with people at large companies that they know, simply because we can expect a long-term correction, when financing becomes even more difficult than it was last time. A couple of months.
SA: It is prudent to have relationships with bankers, so if you need to test the market, you already have those relationships. In addition, keeping in touch with customers and larger strategic partners who could be natural buyers for the company can shorten any sale process later on.
Credit: techcrunch.com /