I was at Journey 2007  (E&Y’s yearly conference for startups and VCs) last week – it was an OK conference, a good way to catch up with people I haven’t seen for a while. I did sit through one interesting panel on Mergers and Acquisitions, and heard some additional insights that I would like to add to my “Long Road to Integration” series. The points reiterate some of the points I have made before, but I thought it was worth posting them anyway – since the whole panel more or less agreed with them.

The first is that there is no such thing as a merger of equals – the larger company ACQUIREs the smaller company – and make sure you understand that before you go into the transaction. Also, the bigger size difference between the company, the greater the chance for a successful outcome.

Even though you may need to let the CEO go, make sure you keep on the 2^nd a 3^rd level management at the company. They are what keep things ticking.

Finally, since culture issues are a large culprit in the failure of an acquisition the acquiring company should appoint a SPOC.

I am not sure why we haven’t heard more about the effect of the sub-prime mortgage crisis on startups and VCs, but it seems clear to me that we will see an effect. The bad 3Q results (and bad 4Q forecasts) for many financial institutions will have a delayed effect on many later stage enterprise software startups. 

The Finance industry is a very large consumer of technology, and in many cases willing to be an early adopter of interesting technology. Of course, as with any downturn, new initiatives are always an easy target, and usually the first to go. Many enterprise software startups pin their hopes on selling their products to large US financial institutions. Those that have already signed deals- congratulations! Those that have deal propects in the pipeline, but haven’t signed the deal - don’t count your chickens, at least until the banks start growing again. 

No matter how the larger economic issues play out - the subprime  mortgage crisis will be a bad deal for startups.

I am sort of surprised that I am back on this subject again, but when I read that Microsoft’s Ballmer plans to buy 20 smaller companies next year (Ballmer: We Can Compete with Google) it drives home for me the importance of being able to integrate well in the aftermath of M&A. My best guess is that those 20 companies will include 1-2 large companies, the rest being small and midsize companies - companies that are “innovating in the marketplace” (a term we used to use at IBM Research). So Microsoft is effectively outsourcing a good portion of their innovation, and placing a big bet on being able to integrate these acquisitions into the fabric of Microsoft.Thee types of smaller acquisitions seem to be in the cards for IBM and Google - and I think more and more technology companies will be outsourcing their innovation this way - augmenting internal “organic” growth with external  ”inorganic” growth. Oracle seems to have gotten this down to an art (though they tend to swallow whales rather than minnows), and even SAP has jumped on the bandwagon. One issue that will clearly come with these acquisitions is how the acquiring company doesn’t kill the spark of innovation that exists in these smaller companies  (of course that is assuming that they want to keep the innovation alive, and aren’t just buying a specific technology or existing product.I had the opportunity the other day to speak with someone that was on the Corporate side of an acquisition and discussed what was their thought process at the time of the acquisition, and how that differed from how things turned out after the acquisition.One thing that struck me was that both sides were fooled since they were (paraphrasing Bernard Shaw)  ”two companies separated by the same language”. The company being acquired thought they were communicating important information about the acquisition, but it turns out that they were using internal shorthand to describe people and situations, which were interpreted completely differently by the other side. This was probably exacerbated by the fact that one side was Israeli and the other American - but it could have happened with any two companies - especially when there is a high impedance mismatch between the two (or in English - the companies are of very different size). . For example when one company said a manager “kept the trains running on time” - they meant a clerk that could keep to a schedule - while the other side thought  they meant someone could manage a complex system with all its nuances and make sure that it keeps working. Understandably these kinds of miscommunications caused a lot of faulty decisions to made during, and right after the acquisition.In my experience it takes about 9  to 18 months until the sides really start to understand each, how the other side works - and how they need to work together. That is assuming that everything goes smoothly. If you try to speed it up too much - you will end up killing the innovation, and you may end up killing any possibility of a successful acquisition.So what is the bottom line? Assume that you will need to keep the current structure of the acquisition intact for about a year before you can make any drastic structural or strategic changes. See the rest of my recommendations in previous posts - and perhaps hire a consultant that has been there and can help smooth the transition.