A trend worth watching: A new wave of startup M&A

By Idan Netser, partner, DLA Piper

We are witnessing a new wave of early-stage technology startups joining forces through mergers and acquisitions, many of which have been led by Israeli startups.

Venture capital and technology professionals should take note as this represents the influence of the Israeli tech community, and a welcome trend to scale, drive innovation and spur faster growth in startups.

Earlier this summer, Magneto Commerce acquired Shopial, a six-year-old Israeli startup that developed a unique technology to allow online businesses to reach new customers in one click at scale from social networks. Prior to its acquisition, Shopial raised a couple of millions of dollars in three early-stage financing rounds. Magento, based in Campbell, California, and founded in 2008, provides a platform for open commerce innovation. From its inception, Magento has raised over a quarter of a billion dollars.

Following the acquisition, the Shopial team will relocate to the U.S. to join the Magento business intelligence team. In an interview with a leading Israeli paper, the founder and CEO of Shopial, Ofir Tahor, explained that he agreed to merge Shopial into Magneto to better position the product and the technology in the market and to improve its competitive advantage, as well as to increase the number of customers and have access to a larger development and marketing budget.

Tahor’s observation is spot on, and he is not the only entrepreneur to recognize the benefit of merging and partnering with another technology company in the same space.

Other recently reported startup M&As include WeWork’s acquisition of Unomy, Spacemob and Fieldlens; Gett’s acquisition of Juno; WalkMe’s acquisition of Jaco and Abbi; Wix’s acquisition of DeviantArt; HoneyBook’s acquisition of Wedding Spot and AppmyDay; Taboola’s acquisition of Commerce Sciences, ConvertMedia and PerfectMarket; and Como’s acquisition of Keeprz.

Interestingly, there is a common Israeli connection to the companies mentioned above, and one should wonder whether this is yet another creative phenomena springing from the young Israeli “startup nation.”

This wave is most welcome. Joining together affords the consolidated company a larger post-consolidation pool of talent, customers, technologies, products, investors and access to capital, enabling the startup to better build innovative and disruptive technologies. And technology consolidations can generally be done quickly and efficiently, on a tax-free basis, for example through a stock-for-stock exchange. In certain circumstances, it can provide the founders with the opportunity to monetize and cash out as part of the transaction.

This M&A fuels a growing ecosystem of talent and technologies venturing to rise together. It also better positions companies and technologies in the market and improves their chances to succeed. Such opportunities for growing collaborations between technology companies should be explored, pursued and capitalized.

The benefits of early-stage technology companies coming together are many. The merged entity immediately benefits from a greater access to a larger pool of human talent, customers, technologies, products, investors and access to capital, all of which support a higher company valuation.

In fact, companies could turn to their investors (or reach out to new investors) and raise capital for the purposes of effectuating a merger transaction. Venture firms and other financial institutions seem to be highly receptive to such propositions.

Merging companies and technologies often create a more appealing value proposition for customers, who can receive a larger array of services or benefit from additional features or technologies. Consolidating also cuts costs, especially on real estate and technology more smoothly than in the typical consolidation, with higher chances to succeed.

Company founders and even key employees often appreciate other aspects of such transactions. Through simple tax-free reorganization, the founder and employees of the target company can receive stock of the acquirer, which is based on the relative and agreed upon pre-transaction value of both companies.

The transaction also presents a liquidity opportunity. A portion of the consideration in the transaction can take the form of a cash payment (rather than stock), as well as cash earnouts based on the future achievements of certain business goals. Although cash consideration will generally be treated as taxable income to the recipient, stock received in a tax-free reorganization should not be subject to immediate taxation and should preserve all other tax benefits, such as the favorable tax treatment of qualified small business stock and stock holding period for long-term capital gain treatment.

The immediate results of these consolidations are new emerging companies that, with happier founders and key employees, satisfied investors, and bolstered technologies and products, stand a better chance to succeed.

Startup M&A is a trend worth watching over the coming months. And it will be interesting to see what the longer-term results are for these opportunistic young companies.

Idan Netser is a partner with the law firm DLA Piper. He is based in Silicon Valley and can be reached at idan.netser@dlapiper.com.

Photo of M&A letter blocks courtesy of pichet_w/iStock/Getty Images