Snaring a Suitor
By Dennis C. Carey

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Building Bridges
Too often, small companies assume a sale is a single event - a short-term transaction, driven exclusively by the interests of the buyer. But for most companies, the challenge is to position themselves for a sale that allows them to accrue the greatest benefits and enjoy the smoothest integration process. Rather than waiting for the phone to ring, a small, growing company might want to begin nurturing a long-term relationship with a potential buyer or buyers. Creating an alliance between your company and a larger company with the resources to make acquisitions lays the groundwork for a possible sale without compromising your independence or closing off other options. Rather than a marriage, a strategic alliance prior to a sale is like an extended romance that leaves open the possibility of greater things to come.

For a number of years, I've been involved in a small medical company that developed a path-breaking technology for treating flesh wounds. The company went public in 1996, even before the product had FDA approval. Many would have viewed this as the opportune moment to seek a buyer and cash out. But rather that try to move immediately to a sale when the company was still in its infancy, the company's board and its executives saw the advantage of growing the business through a strategic alliance. In trying to forge that alliance, the company deliberately looked at large companies that could bring strong national distribution links and a proven brand-name power. Of course, the company also looked for partners with the resources to acquire us when the time was right. But an immediate sale wasn't the objective. Soon after the company went public, we reached a distribution agreement with Johnson & Johnson, helping to boost the stock and grow the company.

Today, the company is far better poised for a sale than it was four years ago. Back then, it was merely one of a number of emerging health care firms struggling for recognition. Its advantages - a patented technology and a clear demand for the product --made us confident that we could one day sell the company. But rather than shopping around for a buyer, we believed an alliance would give us an infusion of cash, new legitimacy on Wall Street and the ability to have our management still run the company, making it more valuable in the long-run.

Opportunities for these types of alliances are growing. Under pressure to innovate, many large companies, heavily dependent on R&D, often find it just as easy to go out and buy innovation as to develop it internally. The question the buyer must ask, though, is when is the right time to purchase a fledgling but promising company. Sellers can help make that decision by offering the possibility of a strategic alliance: an arrangement that lets a buyer test the waters.

This arrangement is also advantageous to the seller. After all, the very act of putting a company on the block raises questions in the mind of a potential buyer. In many cases, it creates the impression that you no longer believe in the company, or simply want to get cash out while you can. The strategic alliance puts that concern to rest.

Long-term Relationships
When a larger company takes a stake in your company, you also achieve something intangible that can lead to a future sale: a strong business relationship. Relationships are a part of every element of business, but they're particularly helpful in positioning a company for a sale. Even if the relationship is purely personal, one CEO to another, it can establish a level of trust that makes a purchase more attractive to a buyer. David Bohnet, founder of the Internet site GeoCities, had known Jerry Yang and David Filo, the founders of Yahoo!, for some time before Yahoo! bought Bohnett's company for $4 billion. In their discussions, the three executives learned they had similar visions of the Internet, advertising, and e-commerce. Not surprisingly, Yahoo! had taken a stake in Geocities almost a year before the sale, so the relationship between the two strengthened.

Never underestimate personal relationships. At the highest level of corporate mergers, a working relationship between senior executives is often the best way to spark negotiations for a sale. When he announced his merger with Time Warner, AOL CEO Steve Case mentioned his friendship and past work with Gerald Levin as helping to spark his thinking about a union between the two companies.

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