What about a merger?

"What about a merger? Why aren't you talking about this?" Some founders have questioned me when we discuss "Exit Strategy" and "Most Valuable Product Journey" topics. The name "Exit Strategy" automatically makes one think of handing over the company, putting money in the pocket, and taking a sabbatical on the beach.

Although this is the dream of some founders, it's not for everyone, and this is not the only path. You probably see yourself just beginning your entrepreneurial journey and don't think about exiting now. Or maybe you have the desire to be the major consolidator, buying out your competitors. Great!

These are two possible paths. But what we're going to discuss here is another: the path of joining forces and staying in the game. Depending on the market you operate in, this might be the most viable path not only for success but also for survival.

So get ready because today we're going to talk about mergers!

Defining Merger

There's a difference between the formal definition of a merger and what those who ask me understand by a merger.

The formal definition

Formally, a merger is a transaction between companies of similar size, where a new company is formed from the combination of two or more others. That is, legally a new entity is formed and, in the public eye, a new brand. Think of Itaú+Unibanco as a classic example. But considering all the tax, legal, corporate aspects, and a host of complications involved in stamping a transaction as a merger, this is an exceedingly rare event, especially in the world of startups. And I think that's not quite what we're talking about, right? So in practice, the theory is different.

The Definition That Matters: Yours

In my understanding, what you (and the founders who asked me) want to know about mergers has a lot to do with the feeling of continuing to build. That is, the transaction doesn't establish a fixed timeline for the company to go one way and you another. It seems like I wasn't talking about this, right?

So, we're talking about you continuing to own the company with which you "moved in together," even if you own only half of what you did for the company you founded (or less). But what if you own very little? Does it still count as a merger? The feeling changes, doesn't it?

It's not black and white. It's more accurate to say it's a spectrum. Actually, a matrix. And since it's about emotions, it would practically be a map. The map of the founder's heart in relation to the transaction.

You know what, let's draw this map!

The Emotional Map of Mergers vs. Acquisitions

It might look something like this:

Translating our map: if the transaction involves a high percentage of stock swap and little to no cash, the founder will likely feel their company has merged rather than been acquired. However, this might not hold true if the companies are of very different sizes.

The exchange of stock, as opposed to other retention mechanisms, makes the founder a part-owner of the resulting company for an indefinite period, whether it's a new company or one of the existing ones. On the other hand, if your company joins a much larger one in a stock exchange transaction, your sense of ownership will feel more like that of a senior executive than the feeling of steering the wheel you had with your "baby".

As imprecise as this representation might be, the perspective of motivation and intention is most important for determining what comes after the deal. And the behavior of the partners is crucial for determining the success of a merger.

How Intentions Shape a Merger

A deal in a stock exchange format, especially between companies of very similar size, should originate from the intention to keep the founding teams together for the long haul. If this isn't the intention, the risks to the resulting business could be significant. A misalignment among founders could result in some of them leaving the company while retaining a significant stake. This scenario hampers capital raising efforts and leaves the remaining founders with difficulties in leading the company.

One of the great challenges in the world of M&A is making the contract reflect the real intentions of the people involved. This is particularly challenging in the case of mergers, precisely because of this definitive marriage-like perspective.

The Movile Example

One of the best examples of a successful merger between startups in Brazil is that of Movile, which today is better known as the "owner of iFood". It was born from the merger of SMS-era competitors of similar sizes: Compera, NTime, and Movile. The founders of these companies became partners in the resulting company (and remain so to this day). They chose the Movile brand for its attributes, not its size. When the companies merged, they were making only a few million reais and ended up forming a titan of the Brazilian ecosystem.

From the perspective of intention, the founders wanted to join forces to achieve something much larger, rather than fighting against each other. The strategy was very successful because the stock exchange deal reflected their common goals.

It doesn't matter whether the resulting company was new or if the CNPJ (the Brazilian tax registration number) of one of the previous ones was used. Nor is it relevant that a new brand wasn't created. What's important is that the intention was to create a national giant, together. And that's what happened.

The Importance of Value Creation for Mergers

Everything we've discussed about building your Most Valuable Product applies equally to this concept of merger. That is, the theses, the companies for each thesis, the people from these companies, and the relationship to be built so that the outcome is a business. If this process is conducted masterfully, the perception of value of your company grows. And in a merger, the relationship between the companies' values will determine your percentage of the resulting company. Therefore, the journey of building a greater perception of value is equally important.

Another aspect is that the opportunities for deals you will find by exploring this path are varied. Some theses may lead to deals with a feeling of merger, others to acquisitions. The steps are the same, even if the destination is different.

Missing the opportunity for a merger can even be fatal for your company

Going back to the Movile example, the competitors were in a relatively fragmented market. Entry barriers were not extremely high. They could have continued to skirmish among themselves for years and remain small. However, when several of them joined forces and formed a larger player, the game became much more difficult for the smaller ones that remained isolated.

This could happen in your market. And in that case, you don't want to be caught off guard.

"Luck favors the prepared mind."

Louis Pasteur

You might even lead this movement. You could become the consolidator, but that's a topic for another post.

Conclusion

As we explore the universe of mergers, it's clear that the line between merger and acquisition is more a matter of perception and intention than of rigid definitions. Success in these operations transcends purely commercial logic and is defined much more by the relationships and emotions involved. For entrepreneurs thinking in the long term, the path of joining forces to dominate markets is usually less risky than going it alone.

To continue building your 'Most Valuable Product,' be open to this. The world moves fast: positioning yourself as a leader or consolidator in your market is a matter of preparation.

Stay tuned for our next discussions, where we will dive deeper into how to make all this happen.