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E-Folder - Build Versus Buy - A Merger and Acquisition Strategy for Information Technology Companies
As a Merger and Acquisition advisor, we regularly dialogue with the top executives in the information technology industry. We have to chuckle when we reach a decision maker with a large IT company and he says, "We have a corporate policy that we do not buy companies." Does this guy read the indust
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
ry publications? Is his company's development group that good? Does he understand the first mover advantage or window of opportunity?
We have gotten past the dizzying array of Internet product introductions, but the pace of technology introduction has again returned to robust levels. Any large co
We have gotten past the dizzying array of Internet product introductions, but the pace of technology introduction has again returned to robust levels. Any large co
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
mpany that feels it can keep pace with this force through internal development efforts alone is headed down the path of extinction.
Almost everyone will agree that information technology will be a primary driver of controlling costs in U.S. industry. Technology is our answer to remaining competit
Almost everyone will agree that information technology will be a primary driver of controlling costs in U.S. industry. Technology is our answer to remaining competit
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
ve in this world economy. A great deal of the technology development is coming from small, entrepreneurial, nimble, low overhead companies.
There is, however, a huge paradox in the market. The institutional buyers of technology are relatively conservative late adapters. This prevents the expecte
There is, however, a huge paradox in the market. The institutional buyers of technology are relatively conservative late adapters. This prevents the expecte
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
d innovation and commercial success that should naturally follow the innovation and passion of these small technology innovators.
These entrepreneurs respond to a market need and achieve encouraging initial success from the early adopters. They soon hit the wall and are not able to "cross the cha
These entrepreneurs respond to a market need and achieve encouraging initial success from the early adopters. They soon hit the wall and are not able to "cross the cha
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
sm" from a small group of early adaptors to general market acceptance from the conservative majority. There is little economic value created when good technology is in the control or a failing company and the technology never reaches broad acceptance.
Most of the blockbuster new products are the
Most of the blockbuster new products are the
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
result of an entrepreneurial effort from an early stage company bootstrapping its growth in a very cost conscious lean environment. Think of some of the new developments from companies like Google. The big companies, with all their seeming advantages have a very high internal cost structure for n
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
ew product introductions and the losses resulting from those failures are substantial.
Don't get me wrong, there were hundreds of failures from the start-ups as well. However, the failure for the edgy little start-up resulted in losses in the $1 - $5 million range. The same result from an industr
Don't get me wrong, there were hundreds of failures from the start-ups as well. However, the failure for the edgy little start-up resulted in losses in the $1 - $5 million range. The same result from an industr
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
y giant were often in the $100 million to $250 million range.
For every Yahoo or Ebay there are literally hundreds of companies that either flame out or never reach a critical mass beyond a loyal early adapter market. It seems like the mentality of these smaller business owners is, using the exa
For every Yahoo or Ebay there are literally hundreds of companies that either flame out or never reach a critical mass beyond a loyal early adapter market. It seems like the mentality of these smaller business owners is, using the exa
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
ple of the popular TV show, Deal or No Deal, to hold out for the $1 million briefcase. What about that logical contestant that objectively weighs the facts and the odds and cashes out for $280,000?
As we contemplated the dynamics of this market, we were drawn to a merger and acquisition model tha
As we contemplated the dynamics of this market, we were drawn to a merger and acquisition model tha
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
t is used in the networking technology market by Cisco Systems. We believe that model could also be applied to great advantage in the Information Technology industry. The giant networking company, is a serial acquirer of companies. They do a tremendous amount of R&D and organic product developmen
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
t. They recognize, however, that they cannot possibly capture all the new developments in this rapidly changing field through internal development alone.
Cisco seeks out investments in promising, small, technology companies and this approach has been a key element in their market dominance. They
Cisco seeks out investments in promising, small, technology companies and this approach has been a key element in their market dominance. They
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
ring what we refer to as smart money to the high tech entrepreneur. They purchase a minority stake in the early stage company with a call option on acquiring the remainder at a later date with an agreed-upon valuation multiple. This structure is a brilliantly elegant method to dramatically enhance
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
the risk reward profile of new product introduction. Here is why:
For the Entrepreneur:
1. The involvement of Large IT Investor - resources, market presence, brand, distribution capability is a self fulfilling prophecy to your product's success. The halo of the big secure company helps you cros
For the Entrepreneur:
1. The involvement of Large IT Investor - resources, market presence, brand, distribution capability is a self fulfilling prophecy to your product's success. The halo of the big secure company helps you cros
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
s the chasm to the conservative majority institutional customer.
2. For the same level of dilution that an entrepreneur would get from a venture capital, angel investor or private equity group, the entrepreneur gets the performance leverage of "smart money." See #1.
3. The entrepreneur gets to g
2. For the same level of dilution that an entrepreneur would get from a venture capital, angel investor or private equity group, the entrepreneur gets the performance leverage of "smart money." See #1.
3. The entrepreneur gets to g
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
ow his business with Large IT Investor's support at a far more rapid pace than he could alone. He is more likely to establish the critical mass needed for market leadership within his industry's brief window of opportunity.
4. He gets an exit strategy with an established valuation metric while th
4. He gets an exit strategy with an established valuation metric while th
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
e buyer/investor helps him make his exit much more lucrative.
5. As an old Wharton professor used to ask, "What would you rather have, all of a grape or part of a watermelon?" That sums it up pretty well. The involvement of Large IT Investor gives the product a much better probability of growing
5. As an old Wharton professor used to ask, "What would you rather have, all of a grape or part of a watermelon?" That sums it up pretty well. The involvement of Large IT Investor gives the product a much better probability of growing
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
significantly. The entrepreneur will own a meaningful portion of a far bigger asset.
For the Large IT Investor:
1. Create access to a large funnel of developing technology and products.
2. Creates a very nimble, market sensitive, product development or R&D arm.
3. Minor resource allocation to
For the Large IT Investor:
1. Create access to a large funnel of developing technology and products.
2. Creates a very nimble, market sensitive, product development or R&D arm.
3. Minor resource allocation to
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
he autonomous operator during his "skunk works" market proving development stage.
4. Diversify their product development portfolio - because this approach provides for a relatively small investment in a greater number of opportunities fueled by the entrepreneurial spirit, they greatly improve the
4. Diversify their product development portfolio - because this approach provides for a relatively small investment in a greater number of opportunities fueled by the entrepreneurial spirit, they greatly improve the
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
probability of creating a winner.
5. By investing early and getting an equity position in a small company and favorable valuation metrics on the call option, they pay a fraction of the market price to what they would have to pay if they acquired the company once the product had proven successful
5. By investing early and getting an equity position in a small company and favorable valuation metrics on the call option, they pay a fraction of the market price to what they would have to pay if they acquired the company once the product had proven successful
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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