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Getting more value out of software M&A

by Chris Arkenberg, Joost Krikhaar, Rahul Saxena
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    3 minute read 10 November 2020

    Getting more value out of software M&A Software M&A has higher acquisition prices but often fails to meet expectations

    3 minute read 10 November 2020
    • Chris Arkenberg United States
    • Joost Krikhaar United States
    • Rahul Saxena United States
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    Software firms command high M&A prices but often fail to generate the expected value. How can buyers ensure software acquisitions create value?

    Software companies have commanded unusually high revenue multiples

    Companies have high expectations for software companies—that’s why they have generally commanded higher acquisition prices than targets in other sectors. Since 2017, publicly traded software companies have been acquired at revenue multiples ranging from 4.2x to 5.0x, compared to other sectors’ revenue multiples of 3.0x to 3.6x.

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    But disappointment often follows: In a recent Deloitte M&A survey, buyers expressed that despite a strong deal environment, acquisitions routinely fail to generate their expected value. Only 7% of corporate development teams felt that their previous deal exceeded their expectations.1

    Why do M&A transactions for software companies often fail to meet expectations? Survey respondents reported their top three reasons:

    • Their expected sales did not materialize: Standalone revenue did not meet projections.
    • They did not achieve expected revenue synergies: Anticipated growth from the transaction fell short of plan.
    • There were gaps in integration and execution: Challenges prevented the transaction from realizing its potential value.

    According to the survey, the four most common acquisition drivers—product portfolio diversification, technology acquisition, new customer base, and digital strategy—all focus on growth. However, accelerating sales to meet purchase price expectations requires exceptional go-to-market integration, execution, and tight collaboration between the buyer and acquired company, especially across their product and go-to-market teams.

    What this means for buyers

    Each deal is different, of course, but every buyer can apply key learnings—based on cases we’ve seen—to create value from software acquisitions.

    Develop a combined value proposition. A major hardware provider accustomed to selling to large enterprises acquired a series of mid-market software companies. The buyer’s sales force initially perceived the solutions as inferior products, despite their appeal to new or different customer segments. This disconnect shows the need to quickly develop a value proposition that speaks to the combined portfolio’s rationale and customer benefits. This can be followed by companywide product portfolio guidance and field enablement programs.

    Prioritize joint product development. While a product portfolio strategy is often embedded in the deal rationale, it takes time to develop a road map that aligns stakeholders on both sides. An enterprise security services company acquired a security platform to accelerate its product road map. Development work was delayed due to misalignment in product integration priorities within the product teams, directly affecting ROI. Acquirers should engage product organizations early to align and prioritize product integration opportunities, with executive alignment from the acquired company.

    Jumpstart cross-selling and enablement. Enabling two sales teams to cross-sell effectively requires overcoming strategic, execution, and behavioral challenges with coverage, selling motion, culture, and more. For example, a global technology conglomerate transitioned the acquired company’s account managers to specialist roles, a practice that has been increasingly common in software. But the new specialists rejected the change, perceiving the new role as a demotion due to loss of account ownership. A delicate approach that empowers the acquired company’s sellers in the new role can prevent attrition and incentivize sales behavior that supports post-acquisition revenue growth.

    Keep partnerships in mind. Channel partners and technology ecosystems are playing larger roles in software but present their own set of integration challenges. When an enterprise services company acquired a software company targeting the DevOps community, it expected the existing partner ecosystem to accelerate its new purchase’s growth. However, partners were either incapable of or uninterested in investing time to sell the newly acquired company’s products. Scaling through indirect channels takes upfront effort and involves identifying and recruiting the right partners, updating the value proposition, and partner enablement. Acquirers should expect minimal partner contribution initially but should invest time upfront to enable them to scale in the long run.

    M&A is costly in time and money, both up front and throughout integration. Leaders can achieve better results for the company and its ecosystem partners through greater planning and communication between acquirer and acquired company, stronger alignment across product and sales teams, and a clear integration and value creation plan.

    Acknowledgments

    Cover art by: Viktor Koen

    Endnotes
      1. Deloitte, M&A Trends Survey: The future of M&A, 2020. View in article

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    Topics in this article

    Mergers & Acquisitions , Technology, Media & Telecommunications , Technology

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    Rahul Saxena

    Rahul Saxena

    Managing Director

    Rahul Saxena is a software-focused professional with 14+ years of corporate and consulting experience. He enjoys leveraging his software industry background to solve complex business problems, drive transformation changes, and capture value for software companies. He is also passionate about cross-functional collaboration, mentorship, and collaborative leadership to generate impact and exceed expectations.

    • rahulsaxena@deloitte.com
    Joost Krikhaar

    Joost Krikhaar

    Principal | Mergers and Acquisitions | TMT

    Joost leads Deloitte’s High Technology M&A Integration and Divestitures practice. He advises executive teams of Fortune 100 companies in the high technology and media industry on complex acquisitions, divestitures, and joint ventures. Joost brings 20 years of experience in the high-tech industry both as an advisor and as a member of corporate strategy and development departments with an emphasis on synergy planning and capture, overall integration management, Day 1 readiness, and strategy integration and optimization.

    • jkrikhaar@deloitte.com
    • +1 415 783 4091
    Chris Arkenberg

    Chris Arkenberg

    Research Manager | Deloitte

    Chris Arkenberg is a research manager with Deloitte’s Center for Technology, Media, and Telecommunications. He has 20 years of experience focusing on how people and organizations interact with transformational technologies. Chris is also an avid video game enthusiast, stomping the virtual grounds since the days of the 2600.  

    • carkenberg@deloitte.com
    • +1 415-783-7025

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