Disrupting M & A Is Tough, But the Prize Is Big
The Internet is good at matching, so those high M&A fees that power Wall Street will be disrupted. Buyers and sellers will find each other and wire transfers will flow. Well maybe, but the winning formula is not yet apparent. This is a tough business to disrupt for two reasons:
- The buyers have a lot of power, so if you sell services to them you operate in a brutally competitive market.
- The sellers know that relationships and nuance matter to getting best price and computers are lousy at relationships and nuance.
The most mature segment is the deal room, basically replacing email attachments with a secure place for buyers and sellers to send documents back and forth.
Intralinks is the deal room pure play leader. They are a publicly listed half-unicorn (valued around $500m) that emerged from the Dot Com era. Today, the deal room model is being disrupted by Dropbox and Box (both of which face disruption from Google and Amazon). So Intralinks have lots of better faster cheaper competitors nipping at their heels such as:
Big M&A shops offer their own deal rooms, such as Merrill Datasite. Other service providers also offer deal room capability as an ancillary service such as Bowne/RR Donnelly.
DealRoom Conclusion: the deal room business is brutally competitive and commoditizing fast.
The other areas where technology can impact the M&A business are:
- Discovery through sourcing marketplaces.
- Short-Listing & Due Diligence services.
Discovery through sourcing marketplaces
Whether you are buying or selling, you start with search to create a long list of potential buyers/sellers. This is search, so Google is the elephant in the room. The discovery sites all offer a) some proprietary data b) a registration wall so that you cannot simply use Google.
Intralinks has moved into into this space by acquiring Deal Nexus, to escape the commoditization of the deal room space. The discovery sites include:
DealNexus: acquired by Intralinks
Axial Market: raised a Series B and founded by Peter Lerhman of Gerson Lehrman Group fame so looks like a contender.
Dealgate: Zurich based
Second Market: got traction by being the place to buy equity in hot hypergrowth pre IPO stock such as Facebook.
ExitRound: tech focus
BizBuySell and BizQuest: targeting the low end such as sole proprietors and franchisees with a simple bulletin board type service (these are really more like real estate listings and in a different market).
The leading mid-market discovery sites are likely to gradually add commodity functionality such as deal rooms, CRM, workflow and NDA processing/recording. These tools will appeal to niche intermediaries who don’t want to create tech platforms in-house and need to be super efficient on the admin side.
The trickiest issue is how marketplaces can earn their success fees if the transaction does not conclude on their platform. This is the brilliance of Angel List Syndicates. You transact on the platform because they take care of all the boring admin stuff.
Sourcing MarketPlaces Conclusion. This is a networks effects game. One big winner could emerge. The network effects winner will have to create value for all the niche intermediaries who operate at the ShortListing and Due Diligence stage. It is unlikely that these deals will happen without any intermediation (there is too much at stake). When something truly disruptive appears such as Angel List or Lending Club it does so by empowering a new type of intermediary (and those intermediaries are essential to the network effects)
Short-Listing and Due Diligence
Short-listing is where relationships and strategic insight matter. Buyers don’t want to sip from a firehose and don’t want to expose their interest too early. Sellers don’t want to waste their time with unqualified buyers. Global 2000 firms have in-house Corp Dev teams to do short-listing which is a high value add function. The Mid-Market (aka the M in SMB) outsource short-listing to niche buy side intermediaries. One can imagine big data recommendation engines assisting in short-listing but only when one network effects winner has emerged with enough data.
Both Global 2000 and Mid-Market outsource accounting and legal Due Diligence to some degree. This is a service business that is likely to move offshore and may gradually get impacted by technology (but that is an entirely different market). The winning marketplace will provide great deal flow to these services firms.
Conclusion; I see many niche intermediary firms in this space but no disruptive plays and I expect these niche intermediary firms will gravitate towards the discovery network effects winner and let that discovery marketplace handle the commodity admin processing.
It is possible that a big network effects winner will emerge and that winner will a) be a Unicorn and b) change the M&A game and c) enable lots of niche intermediaries to thrive. I think that will happen but we are still in the early days of this market.
