| No risk, no reward is one of the oldest adages in | | | | for $224 million. |
| business. This formulation of strategic risk was first | | | | Dean, acting in the Cisco tradition, left entrepreneur |
| expressed in written form by the Greek scholar | | | | Demos and his management team in place and let |
| Herodotus in 450 B.C. | | | | the company operate with great autonomy. The |
| In the realm of corporate mergers and acquisitions, | | | | result was a win-win outcome. By 2005, Dean Foods |
| the challenge for many companies is to obtain a | | | | had more than $10.8 billion in revenue and was bigger |
| highly desirable product or technology while risking as | | | | than Kellogg and H.J. Heinz. |
| little capital as possible. | | | | With successes like this, it may seem surprising we |
| While growth through Merger and Acquisition | | | | don't see more hybrid deals. The reality is the hybrid |
| continues to be a highly popular strategy - in 2006 | | | | concept faces points of resistance on both the seller |
| there was a record $3.6 trillion in Merger and | | | | and buyer side. These include entrepreneurs who are |
| Acquisition activity, according to Thompson Financial - | | | | attracted by the glamour of venture capital, and |
| many CEOs and CFOs remain wary about making | | | | CEOs and CFOs in large corporations who continue to |
| deals. In a recent survey of large corporation | | | | equate ownership with control. |
| executives by Accenture, 45 percent reported their | | | | Obtaining an investment from a venture capital firm |
| most recent Merger and Acquisition deal had failed to | | | | has great allure to entrepreneurs. Many first-time |
| deliver all of the expected results. | | | | entrepreneurs believe that getting VC money signifies |
| One solution to traditional outright purchases is the | | | | they have made it to the "big leagues." What they |
| hybrid Merger and Acquisition model. It is becoming | | | | often overlook are the long odds. |
| increasingly popular. | | | | According to Jim Casparie, founder and CEO of the |
| In a hybrid Merger and Acquisition deal, a large public | | | | Venture Alliance, the odds of a first-time |
| corporation takes a stake (typically 10 percent to 50 | | | | entrepreneur obtaining venture funding are less than |
| percent) in a smaller company (public or private). | | | | 3 percent. He reports that in 2005, out of 125,000 |
| Generally, this equity infusion comes with a call option, | | | | interested parties making pitches to VC firms, just |
| a right to purchase the entire company at a later | | | | 2,939 received funding. The average amount worked |
| date at contracted valuation metrics. | | | | out to $7.4 million. |
| The hybrid model has been successfully implemented | | | | When an entrepreneur does catch the eye of a VC |
| by Cisco Systems, which began using it more than a | | | | firm, he may face punishing valuations, high expenses, |
| decade ago. Between 1993 and 2007, Cisco made | | | | and time-consuming reviews by multiple parties. |
| 119 acquisitions, many of them in start-ups or small | | | | On the buyer side, resistance to hybrid mergers |
| companies with limited track records. | | | | comes from the traditional culture found in many |
| There are three key benefits for the equity parent in | | | | corporations that equates "ownership" with 100 |
| the hybrid model: | | | | percent control and a centralized, top-down |
| Diversified investments minimize overall risk. | | | | decision-making process. |
| Access to new technologies and products is obtained | | | | However, more and more corporations are coming to |
| at minimal cost. | | | | understand that in the accelerated world of |
| Managed resources are not dissipated. | | | | 21st-century business competition, it is critical to |
| For example, a corporation willing to spend $250 | | | | diversify product development by investing in multiple |
| million could invest it in an outright purchase of one | | | | projects. They are also seeing the advantage of |
| established company or take a dozen $5 million to | | | | fostering an entrepreneurial spirit within the larger |
| $25 million stakes in start-up companies. | | | | corporate structure to improve motivation and boost |
| In the consumer products sector, we can look to | | | | creative thinking. |
| Dean Foods, the leading U.S. provider of fluid milk and | | | | A hybrid acquisition can provide a corporation with an |
| dairy products, for an example of a very successful | | | | efficient vehicle for learning about new products and |
| hybrid acquisition. | | | | technologies. It can also serve as a platform for |
| Supermarket shoppers know Dean Foods through its | | | | additional acquisitions. |
| many local brands, including Borden, Pet, Country | | | | C-level corporate executives, however, must |
| Fresh, Meadow Gold and Horizon organic. | | | | understand that dealing with entrepreneurs requires a |
| One of Dean's most successful acquisitions was | | | | special mindset. Many founders are fiercely proud of |
| White Wave, an organic foods company. It was | | | | their company and protective of its products, and |
| founded in 1976 by Steve Demos, an organic foods | | | | they want to maintain a high degree of control. |
| pioneer. He introduced Silk soy milk in 1996, just as | | | | When both sides understand the benefits of hybrid |
| the organic foods boom was beginning. In 1999, Dean | | | | acquisitions, highly rewarding synergies can take place. |
| Foods purchased a 25 percent stake for $5 million. | | | | As we see more and more hybrid acquisitions pay |
| Helped by Dean's "smart money," product sales | | | | off, the concept will no longer seem daring but |
| soared to more than $250 million in 2004, when Dean | | | | instead will become a basic part of many corporate |
| purchased the remaining 75 percent of White Wave | | | | Merger and Acquisition strategies. |