Go Tech, or Go Extinct: How Acquiring Tech Disruptors Is the Key to Survival and Growth for Established Companies

By Paul Cuatrecasas

"A must read for senior executives looking for new ideas and fresh insights on innovation."

 – Professor Klaus Schwab, Founder and Executive Chairman of the World Economic Forum and author of The Fourth Industrial Revolution

Discover innovative acquisition strategies an

• Language: English
• Publisher: Berkeley Street Press
• Release date: Sep 12, 2019
• ISBN: 9781916194304

Paul Cuatrecasas

Paul Cuatrecasas is the founder and CEO of Aquaa Partners, an investment banking firm based in London. Over the past twenty-eight years, Paul has completed over forty-five merger and acquisition transactions around the world worth more than ten billion dollars and over sixty corporate finance advisory and strategic consultancy assignments. He is the author of Go Tech, or Go Extinct in which he shares his revolutionary approach to transforming legacy companies into forward-thinking industry leaders through the strategic acquisition of disruptive technology companies. Paul has been quoted in The Washington Post, The Los Angeles Times, US News & World Report, and Forbes. He lives (most of the time) in London with his wife and three children.

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Praise for

Go Tech, or Go Extinct

‘A must read for senior executives looking for new ideas and fresh insights on innovation. In Go Tech, or Go Extinct, Cuatrecasas illuminates the challenges of transformation and how we all need to think differently about the opportunities ahead.’

– Professor Klaus Schwab, Founder and Executive Chairman of the World Economic Forum and author of The Fourth Industrial Revolution

‘Go Tech, or Go Extinct is a tour de force, written by an entrepreneur who’s been in the trenches and lives it, every day. This book deserves to be read by every CEO of large, traditional corporates everywhere.’

– Paul van Doorn, former Chief Executive Officer, KPN Mobile

‘If you’re going to read one book this year to better understand the future of M&A, this is it. In Go Tech, or Go Extinct Paul Cuatrecasas offers a new lens on risk-taking and how to transform an established incumbent company. Smart, practical and street-smart, this is the leadership book for the next generation.’

– Stéphane Pere, Executive Vice President, The Economist Group

‘Go Tech, or Go Extinct is packed full of interesting insights from someone who practices what he preaches. Highly refreshing and stimulating, I was immediately moved to consider applying some of the ideas in my company.’

– Michel Denis, Chief Executive Officer, Manitou Group

A fresh thinking, fact- and experience-based book, on how digital transformation can contribute to exponential growth and how technology can create value also to non-technology companies. I highly recommend this book, especially for senior leaders engaged into the digital age.

– Alain Brouhard, Group Chief Information Officer and Executive Committee Member, Coca-Cola HBC

‘Go Tech, or Go Extinct is a practitioner’s masterpiece in explaining both the why and the how of building a future-proofed company. This book really provoked my thinking with new ideas and different strategies that we can apply in our portfolio companies. More importantly it opened my eyes to the folly of not having an answer to the challenge and opportunity that technology presents in today’s business environment. Every decision maker needs this book.’

– Lyndon Lea, Founder and Managing Partner, Lion Capital

‘A refreshing new perspective on how traditional companies can create value in the digital age. Cuatrecasas shows there are many ways to skin a cat. New thinking for a new era, this book is a breakthrough. It comes at just the right time.’

– Saleem Asaria, Founder and former Chief Executive Officer, Cambian Group plc

‘Cuatrecasas delivers a structured and pragmatic approach on how to deal with the challenges and opportunities that technology offers to incumbents. This book is packed with insights and new perspectives, backed up by original research. Immensely valuable reading for the C-suite and all decision-making executives.’

– Antonio Cano, Chief Operating Officer and Member of the Board of Directors, Ageas

‘This is so much more than a theoretical exploration into how big corporates can stay competitive in today’s frenetic landscape. This is a look inside the leading tech acquisition expert’s crystal ball — along with the entire dollars and sense business case behind why forward-thinking corporations need to take action and why they must do it now.’

– Angelique Rewers, Chief Executive Officer, The Corporate Agent

‘If you’re a senior executive focused on driving innovation and leveraging technological change to your advantage, then Go Tech, or Go Extinct is a must-read.’

– Stéphane Rey, Chief Technology Officer, Lombard Odier Investment Managers

Copyright © 2019 by Paul Cuatrecasas

All rights reserved.

Published by Berkeley Street Press, London, UK

No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without written permission from the author, except for the use of brief quotations in a book review.

Although the author and publisher have made every effort to ensure that the information in this book was correct at press time, the author and publisher do not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.

ISBN (Paperback): 978-1-9161943-1-1

ISBN (Hardcover): 978-1-9161943-2-8

ISBN (Ebook): 978-1-9161943-0-4

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paulcuatrecasas.com

To my darling Jessica, Vanessa, Mimi-Rose, and Hugo, you are my everything

I wasn’t real quick, and I wasn’t real strong. Some guys will just take off and it’s like, whoa. So I beat them with my mind and my fundamentals.

—Larry Bird, the only person in NBA history to be named

Rookie of the Year

Regular Season MVP

Finals MVP

All-Star MVP

Coach of the Year

Executive of the Year

Contents

Introduction

Chapter 1

Business as Usual No Longer Works

Exponential Growth

Technology Companies Rule the Day

All Companies Will Eventually Become Technology Companies

Disruption Is Everywhere

Technology: Vitamin or Virus?

An Extremely Brief History of the Internet

Competition Is Everywhere. The Playing Field Is Flat.

The Network Effect

People

Animals and Agriculture

Things

Money

Artificial Intelligence and Changing Behavior

Exponential Change Is Unstoppable

Chapter 2

Adapt, Sell Out, or Die

Surviving the Transition

1. Think Exponential, Not Linear

2. Decide Fast

3. Invest in Imagination

4. Collaborate and Partner to Enhance Innovation

5. Shorten the Time from Idea to Implementation

6. View Humans as an Asset, Not an Expense

7. Plan in Shorter Intervals

8. Create an Open-Minded Culture

Maybe Just Sell Out Then?

The Un-choice to Die

To Stay in the Game, Adapt

Chapter 3

Optimization Isn’t Enough. To Adapt You Must Transform.

Capital Is Not the Lever It Used to Be

The Days of Cheap Capital Are Numbered

Technology, Not Capital, Is the New Lever for Creating Value

The Proof of Value Is in the Valuations

What Companies Are Doing to Adapt Instead of Transform

Investing Through Accelerators, Incubators, and Corporate Venture-Capital Funds

Licensing Technology and Solutions

Trying to Manage In-House

Transform Your Company’s DNA

Seeing the Possibilities Can Deliver the Holy Grail

Chapter 4

Take the Right Risks

Experiments Do Not Fail

Making an Investment, Not a Bet

Incumbents with the Highest Fixed Costs (Risk) Need to Act Fast

Fixed Costs

The True Measure of Power

Bubble-Like Tech-Company Valuations Do Not Matter

Can You Get a Tech Multiple on Your Business?

People Really Are Your Greatest Asset . . . If You Are a Technology Company

Failure Must Be an Option

Act Like a Start-up, Even If You Are in the Oldest Industry in the World

People Want to Work for Winners

Innovation Means Winning

Imagination Is the New Capital

Think Ahead

Chapter 5

Transformation Is Simple If You Can Adjust Your Mindset

You Can Do Both—Innovate In-House and Acquire Innovation

Reinvent and Redirect Means Get Your Mindset Right

You Must Believe Before You Can Achieve

We Can and We Will

Customers Want You to Innovate for Them

Well-Executed M&A Accelerates Transformation and Value Creation

To Exponentialize Value Creation, Aim to Eliminate Risk

Technology-Company Acquisitions Do Not Have to Be Scary

Doing Technology Deals Right

Eliminating the Fears

Chapter 6

The Twelve Steps of Techquisition—The Path to Exponential Value Transformation

Chapter 7

Don’t Break Your Culture. Bend It.

Company Cultures Are Made to Bend

Acquiring Technology Companies Can Help Bend a Culture toward the Future

A Case Study in Culture Bending (and Bonding)

The Power of Teams

Benefits of Bringing in Teams for a Value Transformation

Size Doesn’t Matter

Integrate without Losing Talent

Bend Your Culture, or Prepare to Exit

Preserve (and Bend), Don’t Destroy

New Talent Can Bend Your Culture

Bend to the Future to Move the Needle

Corporate Venture-Capital Funds Do Not Bring Any Bend

The Way Forward

Chapter 8

What’s Stopping You?

Top Eleven Concerns Expressed and How to Overcome Them

1. We will get the valuation wrong and overpay.

2. We can do this in-house.

3. We already get our inorganic innovation through our technology innovations hubs/incubator/accelerator/corporate venture-capital fund.

4. The technology we acquire will probably become obsolete in a few years, so why should we buy the company?

5. With so many technology companies to choose from, how do we find the right one to invest in or acquire?

6. What if the people in the tech company we acquire don’t integrate into our culture or they get recruited away, leave, and take their value with them?

7. We’re just not ready yet.

8. If I screw up the deal, I could ruin my reputation and risk my whole career.

9. But the big tech companies can create for us all the tech tools and applications we need.

10. We don’t have the cash to acquire the company we want.

11. Our board and shareholders will not accept dilutive deals.

Acknowledgments

Bibliography

Glossary of Terms

Appendix

About The Author

Introduction

Someone is sitting in the shade today because someone planted a tree a long time ago.

—Warren Buffett, as quoted in Of Permanent Value: The Story of Warren Buffett

I’ll never forget the day. It was August 8, 2016. I had just come back from a lunch meeting, and I saw the news on the wire: Walmart Agrees to Acquire Jet.com.

I almost fell out of my chair. Walmart did what?! I shouted to my team. That can’t be! What was the price?! What are the multiples?!

My guys were already on the case. Jet.com was still loss making, and US retail giant Walmart was paying $3 billion in cash and $300 million in shares for a company that we estimated had only generated approximately $250 million in revenue, not profit, during the previous year. That’s a thirteen-times-revenue multiple! And the Jet.com site was only launched thirteen months ago!

At first, I couldn’t believe it. Not that I hadn’t seen Jet.com’s sale coming; I just hadn’t thought Walmart would be one to jump in with both feet. Way back near the end of 2012, the year Facebook acquired photo-sharing app Instagram, I had started to realize that technology would soon be a presence everywhere, in all companies, not just in tech companies. Seeing a huge opportunity, my colleagues and I had started to talk with non-tech companies as prospective acquirers of our tech-company clients. However, whenever we tried to sell a tech company to a non-tech company (such as a bank, an insurance company, or a retailer), the deal was usually dead on arrival.

While I believed that non-tech companies needed tech, the traditional companies were different corporate animals: They were so slow. They didn’t see or believe the strategic fit or the vision. They could not fathom what they perceived as the astronomically high valuations of tech companies. If there was any sign of interest, the corporate bureaucracies and systems swiftly killed it off. After a few years spent trying to persuade non-tech companies of the value of tech, we had defaulted back to only talking with tech-company acquirers and private equity (PE) buyers.

But just four years later, in 2016, here was Walmart, one of the most conservative companies in the US, maybe in the world, with a conservative board, approving an unlikely deal. The Walmart I knew wouldn’t approve speculative deals at high prices that would dilute shareholder value. This wasn’t just a little $30 million deal or even a $300 million deal—this was a massive $3.3 billion deal. For a technology company. By Walmart. It felt like a bet-the-company move.

And then it hit me. Walmart was the number-one retailer in the US. This is, speaking in both historical and contemporary terms, a company that wins. It doesn’t lose. But, in 2016, it had been starting to lose to Amazon. Amazon was successfully moving into Walmart’s turf. I checked the share-price charts. Yep—Walmart’s share price was falling while Amazon’s was rising fast. I checked out the founder and CEO of Jet.com—Marc Lore. Yep. He’s a winner. He’s built the right team. Walmart was buying a winner. They weren’t just playing defense against Amazon; they were playing to win. And it was clear that they were going to do whatever it took to win, including buying a team that was among the most talented in the world.

I had been advising on tech deals before anyone even knew what a website or email was. I learned how to do deals with a landline telephone, fax, and voicemail. We got things done. The telephone and the Rolodex were my weapons.

My first M&A deal as an adviser in my own firm was in 1993, when I advised the $3 billion UK-based information-technology company ICL (now Fujitsu ICL) on the sale of its 50 percent stake in electronic-data-interchange company INS to the other 50 percent shareholder, GE Information Services. I’ll never forget flying in from London to the US East Coast, jetlagged, only to go up against two GE executives twenty years my senior and be beaten up on valuation and price. They weren’t having any of the numbers I used to prove my case. I was shaken and a little stirred, but I hung in there and we got the deal done. ICL remained a client of ours for the next ten years, so I’m assuming that they were pleased with the price we achieved (and the twenty ICL deals and strategic advisory projects that followed).

My first capital raise was back in 1995. Using only the phone and fax, we raised just over $11 million for a Cambridge, UK-based company called ATM Ltd. (Advanced Telecommunication Modules Limited) from US venture capitalists (VCs) such as Oak, NEA, and Sequoia, as well as Stanford University. At the time, it was the largest amount of capital ever invested by US VCs into a UK company. We were so excited (and foolish) that we took our entire success fee in ATM shares.

This was a problem: even disregarding the very painful eighty-thousand-dollar tax bill that year, we overlooked the fact that the company’s technology, which was based on the communications protocol called asynchronous transfer mode, was still a bit early for its time and had a slow uptake. The company reduced headcount and pivoted to a new strategy focusing on semiconductor design and licensing. Sadly, it was looking like we had completed the biggest loss-making capital-raise transaction of all time from an adviser’s perspective.

Fortunately for us, the company’s board had the vision to pivot, execute acquisitions, rename the company (to Virata), and complete an initial public offering (IPO) of its shares on NASDAQ near the market peak in 1999. By July 2000, the company had undergone a total of seven funding rounds, raising over $650 million of capital. At its peak in 2000, it had achieved a market capitalization of $5 billion. It was a good early lesson that with technology companies, anything is possible.

Over the following twenty years, I witnessed the emergence and explosive growth of the internet, email, the mobile phone (2G, 3G, 4G), text messaging, client-server computing, integrated circuits, the smartphone, video-on-demand, application software, satellite communications, mobile apps, the cloud, e-commerce, photonics, you name it. I also worked with hundreds of different management teams and entrepreneurs, as well as thousands of different investment teams ranging from private equity and venture-capital investors to hedge funds, family offices, and individual high-net-worth investors.

Even though I’d been an investment banker for twenty-five years and had handled several big M&A deals, I was both surprised and inspired when I realized that the type of deal Walmart had made was not some quirky one-off, as I’d thought at first. It was a harbinger of things to come. Things I had predicted back in 2012 were starting to come to fruition: Walmart’s move was bound to become a trend.

Walmart’s out-of-character move would prove to be crucial to its survival, and I predicted that other established corporates would need to follow suit or face near-certain oblivion. For incumbent companies, the ability to acquire talented teams and technology would become the X factor for success, even among the largest non-tech corporates in the world.

Over the weeks that followed the Walmart deal, we did some research and found that many other non-tech companies were acquiring tech companies. It quickly became clear there was indeed a strong trend emerging and that we, having discovered it early, were on its leading edge. Our focus from that moment on would be to help incumbent corporates see the light before it was too late. We knew right away that we had work to do.

In early 2017, I was reading The Fourth Industrial Revolution, which had been recently published by Klaus Schwab, the founder and executive chairman of the World Economic Forum. This book brought it all home for me. Mr. Schwab described the exponential rate at which advanced technologies such as artificial intelligence, blockchain, augmented reality, robotics, nanotechnology, Internet of Things, 3-D printing, quantum computing, 5G wireless, and autonomous vehicles were developing. They were all advancing at the same time and, in many cases, reinforcing each other, compounding.

One of Mr. Schwab’s comments jumped out at me and provided the initial spark for this very book: As all these trends happen, the winners will be those who are able to participate fully in innovation-driven ecosystems by providing new ideas, business models, products and services, rather than those who can offer only low-skilled labor or ordinary capital.¹

Mr. Schwab had set the scene, but he hadn’t addressed any of the detailed consequences that companies in different industries would face, or how companies should adapt to deal with the revolution he described. I felt something was missing and believed I could see clearly how the next ten years were going to unfold across all industries. I could see that, since humans were indeed becoming increasingly dependent upon technology, eventually the companies that make and sell products and services would also ultimately become completely dependent upon technology. The logical conclusion was that, in order to survive, all companies, including traditional incumbent corporates, would ultimately have to become technology companies. It was, and is, inevitable.

The next ten years would be all about two mega-developments: (a) technology companies becoming the new incumbents, replacing many of the existing traditional industry incumbents, and (b) a selection of the leading non-technology incumbent corporates, such as Walmart, General Motors (GM), and JP Morgan, acquiring technology companies to avoid being disrupted by Amazon, Uber, PayPal, and a plethora of other amazing technology companies that were beginning to emerge all over the world.

Moreover, if the leading non-tech incumbents got it right, then they would be able to improve every line item of their profit-and-loss statements (P&Ls) while also dramatically enhancing the customer experience. And if they got it really right, then they could actually exponentialize their market value (or market capitalization), potentially achieving valuation levels that approached those of the tech companies themselves. To most corporate executives this seemed (and still does seem) fanciful, but to me it was crystal clear.

Despite this pattern being unproven at the time, we decided in my firm in 2017 that we were going to help these non-tech incumbent companies achieve their technology-innovation ambitions. It was time. We knew they needed help. We also knew that not many other experts, namely bankers and consultants, were genuinely interested in helping these incumbent companies adapt to face this challenge.

One of the first things we did in 2017 was design, develop, and trademark a new shareholder value-creation framework that incorporated everything we’d learned during the previous twenty-seven years spent executing technology-company M&A deals. The objective was to help incumbent corporates find the right technology company to acquire (or invest in) and to ensure they acquired it in the right way. We designed a proprietary methodology: a science of technology-company acquisition. We called this methodology Techquisition™.

If you’re a CEO and you get the Techquisition plan right, you will have protected your customers, employees, and shareholders (as well as your own job). In addition, your company should be able to at least double its market capitalization (market cap), no matter the size, at a fraction of the cost of the traditional way to grow your market cap: spending. The return on investment (ROI) over a five-year period for any technology-company acquisition should be at least ten times the level of investment (10x).

As ready as I was in 2017 to apply the Techquisition framework with non-tech companies, however, I knew the market was probably not ready to act (and was probably not even aware of the need to do so). I concluded that the only way to make this mission happen would be to go straight to the decision makers at large non-tech corporate incumbents and discuss it with them directly, one on one. These decision makers would be the CEOs, CFOs, CIOs, CDOs, heads of strategy and M&A, and other C-suite executives.

I took a deep breath and jumped off the cliff into the unknown, sending emails and making calls to companies we didn’t know in industries we’d never been involved in. During the latter part of 2017 and the first nine months of 2018, I personally met or spoke one on one with the CXOs of over three hundred corporates with average revenues of $10 billion and average employee bases of 20,000 people. (The companies I met with are listed on a no-names basis by industry in the appendix, with revenue, market value, and employee numbers where they were available.)

During these meetings, we discussed investing in and acquiring technology companies to guard against disruption and accelerate the rate of innovation. We discussed how tech acquisitions could protect and even exponentialize their company’s market value. We talked about all types of innovation, both organic and inorganic, citing case studies when appropriate. We discussed their industry, their peers, their staff, their culture—everything. Often, by the second or third meeting, the CEO would launch into a long soliloquy about how important—and how difficult—technology and digital innovation were. As the CEOs of these corporates were mostly very well-informed about the economic, social, and technological shifts occurring in the world around them, I perceived these statements (We must do something, but it’s difficult!) as corporate cries for help. It didn’t mean that these corporates were ready for immediate action, but it was clear there was strong interest and, more importantly, a definite need. Even though most companies didn’t know what exactly needed doing, let alone how or with whom to do it, they knew they needed to do something, and soon.

Many companies I met with acted immediately and hired us to help them. For others, there was a barrier that seemed to prevent them moving forward: mindset. Most non-tech companies don’t actually believe they can successfully invest in or acquire a technology company. Most don’t even really want to do it. It’s scary for them. Executives have other priorities, namely hitting the numbers. Senior executives at almost all mid-sized to large corporates are focused with laser-like intensity on achieving the monthly, quarterly, and annual revenue and profit goals, often at the expense of everything else, including the longer-term strategies on which the company’s survival depends. It doesn’t help that tech companies are an unknown and that the acquisition of one is a high hurdle for any traditional company to overcome, especially when there are so few case studies on which to base research. Scarcely any incumbent companies are willing to be trailblazers, even though the leading companies in most industries are. Most companies I talked with experienced some initial excitement about acquiring or investing in a tech company and then drifted back to the usual inertia or else tried to do everything in-house (which, for reasons I’ll go into later, doesn’t work).

Today, the pattern of non-tech incumbent corporates acquiring tech companies is very real. It is happening—in every industry, in every developed nation—and it is becoming urgent. Given the pace of change, you have until early 2021, which is just before 5G will become a major industrial force, to decide whether or not to become a fully technology-enabled company.² Once you decide, you have to move quickly; your competitors have already begun, and your own transformation could take several years. If Walmart, GM, and McDonald’s can do it, so can you. Any company can do it.

If you are experiencing doubts, worry not: I’ll address them all here and show you the way so that you can succeed. It’s not easy, but then transforming and creating something of extraordinary value is never easy. My goal is to ensure that, by reading this book, you will be better equipped to make this transformation as easy and risk free as possible.

This book reflects those meetings and discussions with those three hundred plus companies, as well as the work we continue to do today with our non-tech corporate clients. I describe how we are advising large corporate incumbents to look at the world differently, to think and behave differently—to realize that the future today is not the future that was. By giving some examples of what the best-performing companies are doing and how they are doing it, I offer ideas as to how you can think differently and how you can get your people on board and align interests.

In chapter 1 I discuss how business as usual is over. It has been replaced by "business as exponential"; disruption is everywhere now, and it’s accelerating. You can either use technology as a vitamin to ensure your continued growth or watch it become the virus that makes you sick. In chapter 2 I describe how all large non-tech corporates over the next five years or so will face a