Lexpert Magazine

LEXPERT MAGAZINE | OCTOBER 2017 63 BY GEORGE TAKACH TECHNOLOGY Here are some key considerations for smaller — but critically important — buy-side strategic tech acquisitions Tech Tuck-Ins (Part 1) TODAY, all companies are tech companies — or at least they need to be. It doesn't matter what your "real" business is; if you don't hy- percharge your supply chain, mar- keting channels and internal pro- cesses with digital and artificial intelligence (AI), you simply will not succeed in the 21st century. It's really just that simple. You will therefore do two im- portant things to become a bet- ter tech company. First, you will organically hire more tech-savvy staff, and augment your internal digital teams with external service providers. But second, you will make acquisitions of small, but incredibly critical, tech teams that currently operate a business in the vertical or horizontal digital space that you desperately need to get better at. What fol- lows is a brief guide to some important is- sues in doing these deals. Let's imagine you're a major Canadian financial institution (but what follows ap- plies equally if you're a retailer, a manufac- turing concern, a telco, a transportation company, or just about any other business operating in the North American econ- omy). You have identified a real need for acquiring some AI expertise. And it just so happens you've found a young AI company (let's call them the Target), with seven staff, who have just launched an AI-based cus- tomer relationship management (CRM) soware product for the financial institu- tion market. e product is just what you are looking for, but you have very big plans for future follow-on additions to it — and you don't want to be sharing those with your competitors. You have discussions with the CEO and the other key team members of the Target, and they are ready to join you, provided their office stays separate in the funky, dig- erati part of town (no offence, but they do not want to be seen as becoming a part of a big bank). And you're fine with that. So the lawyers are called, and the acquisition process begins. PHASED DISCLOSURE OF CONFIDENTIAL INFORMATION e legal activity will start with signing a non-disclosure agreement (NDA). is one should be mutual, because in addition to receiving non-public information from the AI company, you will be letting them in on a bunch of your sensitive material as well, such as your aggressive plans for AI applications in the CRM space. Equally, however, even though you have signed a mutual NDA, you should both be motivat- ed to disclose your respective crown jewels in a phased manner. In essence, instead of one big data dump of all that is secret and valuable, you each should dribble it out to the other, in smaller pieces. All the while, as you roll out bits of in- formation and receive it, you are looking for deal breakers; that way, if you discover an issue that blocks the deal from proceed- ing, you have been wise to have limited the release of your non-public information. Equally, you are just as wise to have limited yourself to receiving as little information as possible from the Target before you broke off discus- sions. is is because you don't want to contaminate your company with the secret information of the Tar- get if you don't end up buying it. Remember, anything of a confiden- tial nature that you learn from the Target cannot be used for your own purposes. is is why you also want to be very careful about the distri- bution of the Target's information within your organization. In short, you must approach the ex- change of confidential information in a very thoughtful and strategic manner. Don't involve your key technical people until you are quite certain that a deal is doable with the Target; there's no need to infect your R&D people with information that, if the deal falls apart because you can't agree on price, they may not be able to rep- licate in the future and will then become an impediment for them in the AI space. THE SCIENCE — AND ART — OF TUCK-IN PRICING is all brings us to the finicky matter of price: what should you pay for the Target? For deals in which more established tech companies are being acquired, when the company has a solid customer base and profits, valuations oen drive off a multiple of sales or earnings. But that's where you really are buying a balance sheet, or more specifically the profit and loss statement. With very early-stage tech companies (of- ten they are "pre-revenue"), sometimes the pricing metric is based simply on a dollar amount per engineer, plus a premium for the soware already developed (or the so- ware may be still in development, as even PHOTO: SHUTTERSTOCK | COLUMNS |

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