Mergers of equals: VTS and Hightower take the rare long view
A few weeks ago, we learned of the news that VTS and Hightower - two of the leading cloud-based leasing and portfolio management platforms for the commercial real estate industry - are merging in a deal that will create one of the largest real estate tech companies in the country, valued at roughly $300 million. The combined company will provide asset management tools for more than 5.5 billion square feet of commercial space across the US and UK. As a marriage of quasi-equals, it’s a union of the sort that is incredibly hard to pull off, but one that - if executed successfully - will be a game-changer for both companies, their customers and the commercial real estate market as a whole.
What these guys have pulled off is a rare, difficult, and incredibly admirable thing in my mind. Generally, private-private mergers of companies relatively equal in stature present a world of risk and uncertainty for both parties. I’ve seen many that would make tremendous strategic sense, but for a variety of reasons they hardly ever get pulled off. The risks of such an undertaking are many - from questions over company leadership, board seats, complicated logistics of combining two teams, uncertainty over job security and lack of control over the overarching business strategy of the resulting entity. Add that to the reality that neither group of shareholders walks away with any immediate liquidity and the risk-reward is often hard to square.
But why? Shouldn’t it be obvious that deals like a VTS-Hightower combination will lead to a much bigger outcome in the end, and in fact decrease risk for shareholders by taking two arch enemies and putting them on the same side of the table? Perhaps, but those theoretical ideas leave out the human realities of these choices. At the end of the day, ego is too often the thing that gets in the way. When considering the complex web of personal dynamics and shifting roles, responsibilities, and levels of control and influence associated with a merger of private companies, you realize that in pulling off a merger like this everyone is agreeing to give up something big to make it happen. You can’t get these things done without checking your egos at the door - and that’s not natural behavior for entrepreneurs and VCs, if you haven’t noticed! As a result, it’s just downright rare that the principals involved can take a fully dispassionate, non-ego-driven, long view on a deal that in the short term will undoubtedly prove extremely uncomfortable.
As GrubHub investor Bruce Barron commented after the similarly noteworthy GrubHub Seamless merger, "It takes a unique management team" to see "how one and one equals more than two. A lot of times, competitors won't even talk to each other." So when these mergers do happen, they’re worth noting and celebrating. What VTS and Hightower have pulled off here marks the triumph of rational decision-making and strategic foresight over self-interest and shortsightedness.
There are, of course, plenty of private-private transactions that do work. The easiest to accomplish are those where a larger company is, without question, acquiring a smaller player. I’ve been involved in a number of these events, and their benefit is often apparent from Day 1. Our former portfolio company Ticketfly (which was purchased last year by Pandora), acquired a number of companies over the years to expand its product portfolio and enter new markets. In 2013, it bought its way into Canada with the acquisition of Prime Box Office (and later expanded its Canadian presence with the purchase of Northern Tickets), and it acquired WillCall in 2014 to enhance its mobile and data capabilities, while also broadening its payments offerings. In both of these instances, there was no question that Ticketfly had the leverage as acquirer of these smaller private entities, thus eliminating many (but not all!) of the complex, personality-driven dynamics that often plague mergers of near-equals.
I’ve been involved on the acquiree side, as well. One notable example is when our company PublicStuff sold to leading government tech player Accela in 2015. We, the PublicStuff shareholders, made a bet that we’d be better off giving up 100% of control and merging with a company that was on the IPO path, rather than trying to raise more capital and taking a longer path to liquidity.
What we never did at PublicStuff, however, was seriously explore the theoretically logical merger with our most direct competitor, SeeClickFix. There were likely many efficiencies to be gained from such a union, and I suspect a well-navigated combination would have attracted new capital and had a far more transformative impact on the market. But the notion of mashing those teams together, combining cap tables and deciding who was going to be in charge made it impossible to even start the conversation in earnest. As a result, I suspect the shareholders, the industry and the customers all lost out.
You may ask, aren’t these combinations bad for competition, and ultimately for customers? I firmly believe these private mergers of equals are far more constructive in driving innovation than they are dangerous by eliminating competition. There will always be intense competition in these newly developing markets. Hightower and VTS were both leaders in defining a new market - and the two most dominant players by a long shot - but that billion-dollar market is still barely penetrated. Even together, the two cannot afford to rest on their laurels. New entrants will be energized by this merger and will quickly find new ways to innovate and attract customers, and that should keep the new VTS on its toes. But having consolidated and strengthened their market position, they’ll have many more resources with which to keep innovating and driving the market, rather than burning cash on excessive sales and marketing expenses in a bloody street fight with a valiant competitor.
As a counter, look at DraftKings and FanDuel as an example. Their desperate battle for growth and customer acquisition arguably directly led to the class-action lawsuits and regulatory questions that have come to define their young industry. The massive ego battle that prevented this logical merger for years has been much discussed, and it has only been the more recent threat to the very future of their market that drove the two to the wedding chapel. The new entity, resulting from a merger that is expected to close next year, will share leadership from both companies, with DraftKings’ CEO Jason Robins retaining the CEO title, and FanDuel’s CEO Nigel Eccles serving as chairman of the board. It’s the right answer, for sure, but one that came about perhaps two years later than it should have.
That counter-example really highlights the accomplishment of the Hightower-VTS deal - ending an unhealthy competition that ultimately redirects capital from innovation to price war-fueled losses. While I hope that more entrepreneurs and VC boards can see their way to setting aside egos and exploring these mergers, I’m certainly not suggesting that it will be all sunshine and roses for teams VTS and Hightower, or any other combination, as they go through the massive complexities of executing this merger. Many of the specifics have yet to be defined, and the devil will be, as always, in the details of execution. But logistics aside, I take my hat off to all parties involved, and hope that others will find inspiration in what should be tremendous success for the new VTS.