Post Merger Integration in the Technology Industry offers some unique challenges
By Robert Heaton, Global PMI Partners
Like many other industries, the technology industry leverages acquisitions either to acquire new products & services, enter new markets and industry segments or simply acquire new customers. And, occasionally, it’s a strategy to eliminate competition or control the supply chain. Someone could think that a standard ‘cookie cutter’ methodology is a suitable approach for driving post acquisition value.
That’s definitely not the case. In this article, we will draw on past experiences to uncover some of the critical challenges of the Tech Industry that need careful consideration and management if successful post deal value is to be maximized.
Let’s start with culture: For many tech companies, its ‘culture’ and way-of-working are both internal and external and a key element of how a company presents itself. Consider these two examples and think about what you might do if faced with the same scenario.
Example 1: A Singapore based regional HQ of a US global tech player made acquisition of a Korean based Cyber-Security business. The purpose was to add much needed Cyber-Security products and skills and realise significant cross-sell and upsell opportunity. BUT! The Singapore business had a consultative to customer acquisition followed by a nurture and grow strategy. Sales people and leadership were compensated accordingly. Customer service was also seen as a key component of on-going success.
The Korean company had an aggressive ‘kill and run’ or hunting approach to customers meaning acquire the customer at all costs, maximize immediate revenue, get the contract signed, hand over to the help desk and move on to the next. Again sales teams and leadership were compensated accordingly.
Conclusion: The goal of acquiring cyber-security expertise made sense, but the go-to market methodologies were at opposite ends of the spectrum. I’m not going into the detail, but can you imagine the difficulties of bringing these businesses and their respective cultures together? We certainly can, and a combination of organization change, strong communication and the use of compensation levers was just some of the mechanisms we used to affect change.
Example 2: A $6Bn global manufacturing business acquired a small $60M technology company to provide value-add tech services to its industrial materials. Again, the strategy made sense, but in post deal phases there was a need for sales teams to work together to increase customer wallet share and also leverage the technology to acquire new customers.
Outcome: Everything started to fall apart when the corporate sales team started to act like 700lb gorillas towards the smaller tech sales people. Egos were bruised often in front of the customer and the envisaged sales revenues started to decline. The problem was further exacerbated when the corporation sent in a small team of ‘graduate management trainees’ to resolve the issue. It’s now 5 years since post-deal and the sales conflict is only just resolved. The cost of lost opportunity and value was considerable.
Challenges with Intellectual Property: are often overlooked leading to significant post deal issues if not managed properly. To start with, software is an intangible, so it is difficult to identify and challenging to assess quality and value. Again, let’s consider a few examples:
- A typical software company acquired another software company to expand its range of product offerings. The acquired software had a strong customer base and recent software development activity had added some market leading capability. All looked good on the surface, but during due diligence, someone got down to the code level and discovered that a large part of the new code was developed using FOSS (Free Open Source Software). Using such software can be productive if it’s being used for personal purposes, but the minute it’s used in commercial environments, you are liable for licensing fees. In this particular case, the due diligence expertise uncovered the FOSS issue and resolved what would have been an expensive surprise and hefty US$15.6M recurring annual charge.
- Another similar acquisition took place and due diligence had done a good job identifying all of the current and ‘in-development’ software assets and IP. The challenge materialized when it was discovered that the code ‘quality’ was poor, resulting in significant performance issues for clients and multiple ‘bugs’. It doesn’t take much imagination to realize the impact this has on brand image, revenue from current and future customers and the cost of fixing poor code on the bottom line?
- And one last example where the development disconnected from delivery. This company had significant software development expertise. Some would say ‘bleeding edge’. That was something to be proud of, BUT, the resources that would install and maintain the software were way behind in their expertise, so in essence, a terrific shop window but the lights were off in the warehouse.
Quality and Accuracy of sales pipeline / forecast data: With over 20+ years in the technology industry, I’ve learned to take a healthy disrespect for tech industry sales pipelines and sales forecasts and some deep dive analysis and qualification is always recommended when bringing sales organizations together post-deal. It pays to keep an eye on the ‘sales culture’ as a keen indicator. By example, a well-known tech company would demand that its sales people had 3 x quota in their opportunity pipeline. And at beginning of every quarter, to no surprise there was three times quota of opportunity in the sales pipeline. The company was going to close the quarter with huge success! Then as the final month of quarter approached 80% of this ‘certain opportunity’ would evaporate into next quarters predictions and they would miss their target. The recommendation? Pay extra care when analyzing sales pipelines and forecasts and use compensation levers in post deal integration to change behavior towards accuracy of pipeline predictions. That way, you can align the company’s other valuable implementation and support resources behind the sales efforts with confidence.
Considerations for continuation of contracted Service Level Agreements (SLA’S)
The Tech Industry revolves around delivery of software licensing, contracted support and maintenance agreements and more recently SaaS type annuity agreements. Most are well documented and have clear deliverables and penalty clauses. The challenges during post-merger integration are numerous but if I can offer a few bullets?
- Is there consistency in the SLA’s (Service Level Agreements) of the acquiring and target companies?
- What is the combined compliance level against existing SLA’s?
- Should some of the previous contracts be ‘renegotiated’ and are there contract renewal dates arising that makes this feasible?
- Are there any on-going contractual disagreements that need to be resolved?
And more importantly:
- Do we have sufficient industry / customer expertise in the sales, consulting, services and support organizations to meet current and future obligations?
- Are we exposed in any areas where expertise is thin on the ground?
- Do we have early engagement of sales / leadership on upcoming contract renewals/
- Have we delivered ‘ modified’ software to customers that we are now obligated to support? If so, i) do we have resources with experience of those modifications and ii) When is that agreement up for renewal and how quickly can we get the customer(s) onto vanilla versions.
And some final areas of consideration
There are many unique challenges in Tech Industry M&A integration and this article has only touched the surface. Some of the other areas that can cause grief are;
- Sales & Marketing expenses and expense approval processes.
- Alignment of Sales and Marketing initiatives with a view to targeting achievable growth and revenue opportunities
- Quality of Sales Management and ability to manage, motivate and coach sales teams. Remember that too many organizations promote their best sales people to management positions and this isn’t always the best outcome.
- Pay attention to possible increase in sales staff turnover. Not only can this create recruitment challenges, it can result in temporary revenue loss, and good sales people will take good customers with them.
And if I can leave you with one last point of advice, watch out for and regularly challenge the tech industry’s supreme ability to engage in gobbledygook and acronyms.
I recall an amusing event whilst working for a very well-known technology company. Several senior leaders and sales people had visited an important customer with the intention of leaving the customer with confidence that their investment was sound and to retain their loyalty to our brand.
After a 45 minute presentation that included lots of technical speak and acronyms, it became clear that the presenters had achieved the exact opposite to their objective, leaving the client’s leadership team totally confused and uncertain about what they had been listening to over the past 45 minutes. The lesson to be learned? Speak with clear and simple language that can be understood by all present.
Anyway, I digress. As previously mentioned, I’ve only touched the surface of the many idiosyncrasies of the Technology Industry and I’m hoping you can see from the examples given that inability to tackle these issues during post-merger integration can result in significant losses not only in financial terms but also in terms of lost customers and reputation.
The advice is to ensure that your acquisition integration consulting resources includes people with strong industry experience and the know how to navigate these challenges early, quickly and successfully.
|Senior Executive Advisor|
About the author
Robert Heaton is a Senior Executive Advisor at Global PMI Partners and has responsibility for the Australia New Zealand regions. He is a Technology Industry veteran, having held Sales & Operations leadership positions in Europe, North America and Asia Pacific for technology leaders SAP, J.D. Edwards, and Cisco. Prior to that, Robert worked in Production Management for Dunlop before spending 10+ years consulting on technology adoption to manufacturing and logistics businesses across Europe. He is a specialist in Mergers and Acquisitions, helping companies prepare for sale/divestment or integrating acquisitions to maximize synergies, efficiencies and overall ROI.
Global PMI Partners, an M&A integration consulting firm that helps mid-market companies around the world by delivering exceptional consistency, speed, and customized execution on the complex operational, technical and cultural issues that are so critical to M&A success.