“For technology acquisitions, one of the hard parts is maintaining and harnessing the innovative spirit of the acquired company, especially when integrating into a larger or more traditional company."

Imagine if Yahoo had accepted a USD 1m offer to buy Google in 1998 so that its founders, Larry Page and Sergey Brin, could resume their studies at Stanford. Would the precision in today's online search functionality be the same?

Imagine if Facebook founder Mark Zuckerberg had come to terms with Google executives, or even MySpace for that matter, in 2004. Would ubiquitous social media news feeds grace our computer monitors and mobile devices as they do now?

Imagine if Sun Microsystems' potential purchase of Apple in 1996 for nearly USD 4bn had succeeded. How might mobile device development have differed in the years that followed?

While the hierarchy among tech titans certainly would be reordered if some, or all, of the aforementioned transactions came to pass, the bigger question is, would the pace and degree of innovation be the same today? After all, the rigidity and emphasis of procedure that defines corporate America is seen as the final resting place of entrepreneurial vigor and creativity. Would Sun have been capable of planning and designing the iPod, iPhone and iPad?

Yet, as technology has come to touch every corner of commercial activity across the globe, wiser approaches to acquiring startups have taken hold.

“For technology acquisitions, one of the hard parts is maintaining and harnessing the innovative spirit of the acquired company, especially when integrating into a larger or more traditional company. In our experience, although challenging, it can be done,” says Principal David Kim, EY's Operational Transaction Services West Region Leader.

Well-placed investments and M&A are ways for companies to test emerging technologies, supplement their internal development and innovation efforts, and expand their horizons. Kim and his colleague, Ken Welter, EY's Global Transaction Advisory Services Leader for Technology, said in their experience, successful integration is one of the more challenging aspects of M&A, especially when the acquirer is looking to execute a transformational deal.

“There are new ways to integrate to avoid killing an innovative growth engine. However, integration lite doesn’t mean ‘no integration’,” said Welter.

First, decisions around whether to fully integrate, and which aspects, need to be determined. There are many examples where limited integration is the right answer, Messrs. Welter and Kim said. However, limited integration still needs an integration plan.

Culture matters

Culture is a central discussion point when determining the level of integration. They laid out lessons that worked for both M&A and understanding JV partners:

1. Short- and long-term strategies need to be defined. Understanding the end game will allow you to build a strong foundation for the future. Many companies also underestimate the time and resources needed to execute appropriately.
    
2. Ensure alignment with both sides of the leadership team. Business as usual and a few conversations won’t set the business up for success. Ideally, offsite workshops focusing on a common understanding of the big picture should be performed.
   
   
3. Partner with the target/investment personnel rather than dictate. It takes time to get to know their processes, culture, and politics.
   
   
4. Joint sales are always harder than it looks, especially from the customer perspective. From the company side, some level of system integration is almost always necessary. The systems need to be able to order the products, recognize revenues, be able to pay commission and have commission defined in the sales employees’ plan document.

Digital integration

The biggest factor driving tech M&A is the increasing role and prominence of buyers in non-tech sectors. Digital and advanced technologies have disrupted multiple industries, and they are making their influence felt across most others.

Market observers and practitioners have said time to market and reaching critical mass are key considerations, and companies often don’t have the time—or the talent—to build the capabilities they need themselves. The automotive and financial services sectors are two prime examples: when it comes to M&A, the deals in both today have as much to do with software and technology as they do with powertrains and money.

The fusion of legacy companies with Silicon Valley startups is a tricky one. Kim and Welter said they have developed a checklist of five points that should guide management teams through a tie-up:

1. Knowing both the “what” and “how” related to synergies in revenue creation and cost take-out: What should the synergy targets be, and how do we realize them?
   
   
2. Identifying the right integration leader who knows the business, has the right relationships AND knows how to harness their organization and its ecosystem’s data to make timely, fact-based decisions.
   
   
3. Taking better advantage of the timing from sign to close to develop integration plans, make operating model and talent decisions, and develop synergy capture plans.
   
   
4. Striving for greater accountability and transparency, including use of collaborative, cloud-based integration/project management tools.
   
   
5. Ensuring clear and direct communication, sometimes to the point of over-communicating. Ambiguity kills.

Additional discussion about the challenges and opportunities surrounding the integration of legacy companies and entrepreneurial firms will be discussed at Mergermarket's annual Technology Forum, which will be held at the Hyatt Regency in San Francisco on May 22.

Matt O'Brien Content Editor Acuris Studios

Follow Matt on Twitter @matt_obri3n or connect with him on LinkedIn.

Matt O'Brien is content editor for Acuris Studios, the sponsored events and publications division of Acuris, overseeing the research and editorial input for events. Matt works with the editors and reporters of Acuris' various publications to ensure the company delivers industry-leading conferences. He has spent nearly 13 years in the news and finance industries. Matt has a political science and international studies BA from Rutgers University.