In this second report from the SIIA’s Ed Tech Business Forum I’ve combined highlights from two lively panel discussions into one Q&A about how investors and publishers acquire and capitalize innovation. Though longer than my normal posts, the conversation is essential homework for anyone on the sell-side who is planning, pitching or negotiating an investment, strategic partnership or acquisition deal.
Question from Robin Warner, Managing Director, The Van Tulleken Company – If you’re considering an investment to acquire a new product what are you looking for?
Heather Myers – Senior VP, Strategic Planning & Business Development, Scholastic – Efficacy is important for us, either proven through research or by customer satisfaction. Then there’s the business fit, the economic upside, and – more important than profit to start with – the quality of the management team.
Steve Siegel – Group VP, Strategy & Business Development, Follett – For us it’s the valuation, the innovation factor, the people and the partnership strategy, and whether it can be licensed rather than acquired.
Rita Ferrandino – Founding Principal, Arc Capital Development – We’re looking for successful, proven business models that are performing in the $3M-15M range that we believe can grow to $20M-30M. We have a formal evaluation process, and if we do invest we stay involved, working with the company, getting to know their current customers and helping position them for success.
Question from Robin Warner – How do you decide whether to build or partner or buy?
Steve Siegel – I think speed is important, so is an evaluation of our internal expertise. If it’s going to be faster to market we’re more inclined to purchase. If it’s aligned with our core competencies, our expertise, and if speed isn’t an issue then we build.
Heather Myers – Scholastic’s preference is to build products internally, but if there’s compelling innovation and speed to market that swings us towards the purchase side.
Robin Warner – Who decides whether to go forward with an investment?
Heather Myers – Acquisitions are “owned” by the head of the division where the product is going to live, plus CEO approval.
Kurt Gerdenich – VP, Director of Technology, Cengage Learning – For us it’s formalized, but every deal has a champion and they’re a major influencer in the decision making process.
Question from Robin Warner – What are your “Do’s and Don’ts”?
Heather Myers – Making sure we have our corporate staff in order. Making sure the IP is protected is critical. Making sure there’s a well articulated business plan. Making sure we don’t loose focus and get spread too thin. And we try not to be encumbered by partnerships in the short term if we’re really seeking an acquisition.
Rita Ferrandino – Making sure you set aside enough time so the team can focus — it’s tough work. The CEO needs to build relationships 12-18 months ahead of when they’re eeded, and understanding where you fit in the market. Don’t be afraid to spend on the best professional advice available, and never be afraid to walk away.
Question from Frank Catalano – VP Marketing at Pearson Education – How many deals do you actually do, and how many do you walk away from?
Heather Meyers – It’s a funnel process. Probably 10% of what comes in the door looks interesting and 10% of those survive the initial vetting, but if something comes along that isn’t as we expected we’re apt to walk away.
Kurt Gerdenich – We’re pretty conservative and will break off a late-stage deal if the price is coming in too high or something comes up in our due diligence. We want to make sure you can can hit the numbers you’ve put out there.
Question from Michael Johnson – Chief Operating Officer, Follett – How do you decide which product innovations to pursue and why?
Robert Fiance – Chief Executive Office, Software Technology, Inc. – Strategic focus is important and so is the customer base. We always ask, where is the customer demand? We look at what advantage we’ll gain, we want to make sure it will be cash-flow positive so we don’t get mired in daily problems, and of course the management team is key and is integral to our decision.
Question from Michael Johnson – How do your acquisitions evolve? What are the typical challenges?
Todd Brekhus – VP Product and Market Management, PLATO Learning – We make sure there is buy-in before an acquisition is competed. Rumor control is important too so we try to get ahead of the curve. But the single biggest success factor is how the leadership in both the acquired and acquiring companies work together. For that, we find that joint monthly briefings work for us.
Michael Golden – VP of Administration and Planning, Pearson Education – Common goals abd aligned interests are crucial. You have to put ego aside. From Pearson’s experience the scale and scope vary so much it’s hard to generalize. You’ve got to figure out where’s the common goal, where’s the — sorry, I’m going to use the word — where’s the synergy that allows the whole to be larger than the parts.
Michael Johnson – How do you decide whether to build, buy or partner?
Robert Fiance – Sometimes a strategic partnership opens the door to acquisition because of extraordinary cultural fit and the strength of the team once we can see them up close. Acquisitions can also change the whole face of the company so we have to be careful.
Todd Brekhus – With SaaS (Software as a Service) platform integration is critical so that’s a big factor so making the decision to acquire is more likely when SCORM an SIF are non-issues. Regardless of the deal structure, however, SaaS can spur the innovation we need.
Michael Johnson – Things don’t always go as planned. When that happens after the acquisition and integration what do you do?
Robert Fiance – We move rapidly to get involved operationally so the deficiencies, if there are any, are understood as soon as possible. Waiting has always been a problem. We try to structure half of the deal as an earn-out, 25% each year. The lesson for us has been to structure a short earn-out, react quickly, get involved, and don’t wait.
Todd Brekhus – Retaining the talent is key so we use the earn-out to incentivize the management team. The deals that have been less successful for us are when we’ve lost that talent. Not alienating but retaining the customer bases is important too and requires an investment in that relationship, which is partly a function of keeping the management team engaged.