Mergers and Acquisitions in the software industry

Source of external innovation

Besides sources of internal innovation, e.g. by building new software products, software vendors are also looking into acquisitions as a source of external innovation. Interestingly enough, acquisitions lead to acquired products but also to process innovations for the resulting combined company. Here is a slide that shows how products are supplied by an acquisition target to an acquiring software vendor.
The acquisition target provides its products either via an asset deal or a share deal.
The software vendor pays a purchase price in the form of e.g. cash, shares or other compensation.

Definitions

Here is a short overview of definitions of terms used in talking about mergers and acquisitions. Merger means that two companies come together under one ownership. Acquisition means that one company is being bought by the other company. Divestment means that one company is selling assets. The terms are shown in the following figure. The blue bubbles are companies.

Goals

Now let us look at examples of goals that are driving the acquisition of software companies. Often we find a growth strategy of a company as one of the main reasons driving an acquisition. Besides that, an acquisition provides the chance to achieve a number of different goals, of which important examples are listed in the following figure.

Due Diligence

The detailed analysis of potential acquisitions is called Due Diligence. It contains the analysis of all aspects of the to be acquired company. The due diligence consists of a consideration of all products, services and payments of the software vendor, its ecosystem of customers, suppliers and partners as well as accounting and controlling. In addition, a cultural due diligence identifies potential issues of cultural integration.

Based on the detail analysis of the status quo, a projection and plan for the future of the target business and organization is created.

Results of the due diligence is a valuation of the target company, a list of all results of the analysis described above and a list of chances and risks in doing the deal including mitigations for the risks and critical success factors.

Chances

There are a number of potential advantages in acquiring a software vendor. They range from extension of the product portfolio to consolidation of markets.

Risks

Nevertheless, there are risks in M&A. Some are independent of the industry you are in, some are very specific to the software industry. It is one of the main tasks of due diligence of an acquisition to identify issues and risks and provide proper evaluation and mitigation of issues and risks.