Editor’s Note: Software AG is ahead of the pack (compared to companies similar in size) in the number of companies it has acquired. Its strategy is to do a large acquisition transaction every two or three years (“large” meaning one that substantially changes Software AG and increases revenue by 20-50 percent) and a number of smaller, technology-oriented ones in between. The company has become very successful at integrating the companies it acquires. We asked Software AG to share insights in what makes a technology company appear to be a valuable target for acquisition, best practices in integrating acquisitions and advice for startups that may want to be acquired.
At Software AG, we distinguish between large, transformational acquisitions and technology acquisitions that we refer to as “tech tuck-ins.” In a pure technology acquisition, we seek companies with very interesting, very powerful technology, around which we intend to build a product after bringing it into our organization. The second kind of tech tuck-in is early-stage products. Typically these fill a gap in our portfolio where we see a substantial market opportunity that we want to capitalize as soon as possible. In this kind of acquisition, we expect customers to come along with the product, and we intend to blend it into our product suite.
Given our volume of acquisitions over the years, we have built a substantial skill in finding target tech tuck-ins that are not on the radar screens of Gartner or Forrester.
Characteristics of an attractive technology acquisition
Software AG competes on speed of implementation and ease of use. Given that competitive strategy, there are several characteristics or key issues we consider in technology acquisition targets.
1. Minimal overlap. First, we try to minimize overlap with our own products. It’s really difficult for us to kill either our technology or part of the incoming technology. Invariably teams suffer; people are tied to products and components, and it becomes really messy. Ideally we want to acquire technology that we don’t have. That way we can spend time on commercializing it as opposed to dealing with all the customer and people issues.
2. Platform compatibility. The second characteristic we look for is compatibility with our platform so that we can blend it into our overall suite – from installation to user experience to monitoring and management.
3. Reference customers. Third, it really helps if the incoming company has five to 15 happy, reference customers – particularly when we buy an early-stage product. This helps us ramp up the commercialization process significantly and makes it easier to market the product and build a pipeline.
4. Key employee retention. Retention of the acquired company’s R&D and other key employees is a highly important aspect. We are not interested in companies that want to flip their company to us. We invest a lot of time and effort truly integrating the acquired company’s employees, and in many cases we place them into top leadership positions at our company. It’s very important that key employees stay and help make the acquired product successful at Software AG.
We’ve observed that even in startups – where change is a constant – employees at the acquired company are afraid for their future. (What’s going to happen now? It’s not the same game anymore; should I stay or leave?) This fear is a huge part of the attitude of people in acquired companies. They mistakenly view the acquisition as a risk to them instead of an opportunity.
Those who view the acquisition as an opportunity usually move into meaningful, important positions at Software AG. Our company has a lot of people from acquired companies in top positions.
5. Bid price vs. asking price. We have a good idea of a potential acquiree’s revenue potential, as well as the potential for synergy with our portfolio, and this dictates our bid price. Obviously, the bid price needs to be above the acquiree’s minimum asking price in order to have room for negotiation. But this is often a challenge, especially with the high-growth types of companies that we like to acquire.
High-growth companies tend to have incredibly high valuations in terms of revenue. Their investors always say there is huge growth potential and hence the company should be worth 10x (or more) the revenue. While that may be factually true, we will need to execute on the growth strategy and actually sell the product – which places the risk on Software AG. If we take the risk, then we don’t want to pay for the opportunity.
Best practices for integrating an acquired company
6. Avoid a one-size-fits-all approach. Our experience in acquisitions has taught us that there are actually no best practices for integration – no methodology for “do this and you’ll get a decent result.” This is a very important lesson. Integrating an acquisition is a situational process.
You can’t, for instance, integrate an acquired organization with a mature business model and mature customers in the same way that you would integrate a company at an earlier life cycle stage with a very fresh new team, very new product and very new kind of customers that are at the early-adoption level. It’s absolutely impossible to integrate them in the same way. Nor can you integrate a German company in the same way you would integrate a Silicon Valley company or integrate a consulting company in the same way you would integrate a product company.
7. Building the right relationship up front is crucial to success. We have found that the most important key to success is making sure the target company is integratable – not only on a technology level but also on a relationship level.
If you don’t build the right relationship among counterparts in the two companies, it will be very difficult to do a transaction. An acquisition transaction is like pushing a ball uphill – the second that you stop, the ball will just roll back down the hill. It’s very hard to get an acquisition up to the top of the hill; if you stall somewhere, the whole thing will crash.
If you don’t build the right relationship among the two companies’ management teams up front, there is practically no way to get a deal done and even less chance of integrating the companies. The teams need to trust each other. Trust is something that usually companies can achieve only when people sit together and discuss things on many levels, as well as engage in social activities such as going out to dinner together.
Technology due diligence is not just about technology. Relationship-building also must extend beyond the management teams. At Software AG, we usually start with technology due diligence before any other piece of due diligence. Quite often that means the technology and product teams sit together. In that phase, we can quickly figure out whether or not the two companies’ teams fit.
It is important to discover this fit up front. If people don’t like each other, the reality is that they will find enough ways to express their feelings (in technical and business arguments) to make sure they don’t have to work together.
8. Make sure change is gradual. We have learned over time the value of leaving things as-is for several months after an acquisition. We make changes gradually and try not to abruptly change everything that the acquired company has been doing. We ease them into the way things run at Software AG and, in many cases, we learn about better ways of doing things and adopt things that they have been doing.
Also, when acquiring a small company, it is always very important to look at the option/benefits plan it has. It is important to continue the game with the same rules rather than saying “this is the way you’ll do it now.” Employees will leave. There is always an element of things you can introduce – but not all at once – and there are certain things you should not touch.
Advice for startups looking to be acquired
9. Understand the potential acquirer’s business. This is step one if you want to sell your company. Seek understanding about such aspects as:
- Where are the areas in which the potential acquirer is working that fit with your business
- What kind of customer does the potential acquirer target
- What is the potential acquirer’s value proposition for its customers
- What is missing in the potential acquirer’s product portfolio
- Where are the potential areas for new growth?
Step two is to start developing a joint value proposition. Develop a joint value proposition that shows the potential acquirer what the joint customer could look like and how to generate revenue synergies from the joint proposition. Make sure you include such aspects as
- Underlying pieces of how the value proposition will be sol
- Unmet market demand that can only be served with the two companies’ combined products
- Whether or not there is actually a customer pain that requires this joined product (more often than not, this is not the case)
10. Make sure you can prove the revenue potential. Often when we talk with people wanting to sell their company, they describe a scenario of making millions of dollars in revenue. But when we ask where they are today in relation to that scenario, they are not anywhere close to being on the path.
We often see grand vanity business plans that have no traction to prove that any of it is real. It’s good to have a grand vision, but it has to be rooted in traction and based on things the startup has already proven.
Most startups are living too much in the future in terms of their revenue potential and how many products they can bring to the market. Instead, they need to focus on what they can really do well, and then do that until they reach a certain size. The goal should be to focus on how to make the most out of the present in order to grow and get to stability. Certainly there must be a vision that leads a startup into the future; but the startup must execute in the present.
Focusing on one thing and doing it really well will diminish the risk of eventually being the last man standing in an acquisition.
Frederic Hanika is Senior Vice President and Head of M&A at Software AG where he is responsible for mergers, acquisitions, investments, divestments, and equity – linked partnerships as well as exploring new sources of growth, such as corporate venturing. He is a member of the Global Leadership Team at Software AG. Jignesh Shah is Vice President of Product Marketing for Software AG’s middleware business. He is responsible for the global go-to-market strategies of Software AG’s SOA, B2B Integration and MDM product lines. For more details on Software AG, visit www.softwareag.com. For more about mergers and acquisitions go to http://www.softwareag.com/corporate/company/companyinfo/merger/default.asp