Mergers & Acquisitions: Sources of external innovation


Besides sources of internal innovation, e.g. by building new software products, software vendors are also looking into acquisition as a source of external innovation. Interestingly enough, acquisition leads 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.


Mergers & acquisitions video lessons

Here are video lessons about merger and acquisition basics.

CLICK HERE FOR MERGERS AND ACQUISITIONS BASICS COURSE


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 a potential acquisition 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.

Find more information on this page: MergerDueDiligence.com

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.

What makes the software industry special?

The following table shows the distinctiveness of the software industry regarding due diligence in contrast to other industries:

Type of DD

Distinctiveness of the software industry

Strategic due diligence

High volatility in time, high impact of platform strategies and partner ecosystems on success

Market due diligence

High market size volatility in time

High frequency and speed of disruptions in markets

Commercial due diligence

High change rate and diversity of business models, revenue models and their combinations

Technological due diligence

Distinctiveness and high change rate of software platforms and other technology

Human resources due diligence

High importance of workforce quality due to low automation in production

Cultural due diligence

Software industry raises high employee expectations in culture

Intellectual property due diligence

Increased importance due to strong role of IP

Financial and tax due diligence

Diversity of business, revenue and delivery models raise challenges

More information on the Due diligence page.


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 mergers and acquisitions. 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.



Find more details at MergerDueDiligence.com

or continue to Business models

or choose another hot topic on this site

Business Models in the software industry and

Mergers and Acquisitions in the software industry

Software Ecosystems

Partnerships

IP Management


(C) copyright Dr. Karl Popp 2017

Google ads


Google

Dr. Karl Popp Profit from software ecosystem book This book is your GPS for the software industry. $62.90 Amazon In stock! Order now!