Considerations for Merger & Acquisition of software companies

Part 1 : Beyond the current product

Introduction

In today’s business environment, mergers and acquisitions are commonplace. This is certainly true in the software industry, where small software companies are often merged with or acquired by other larger companies.

In many cases, the consideration given the potential acquisition is based primarily on the product (or products) that the company has and the revenue that is currently generated by these products. However, as this article will illustrate, deeper consideration needs to be given to insure that all factors leading to a successful integration of the acquired company are made.

The problem with a “current product” focus

While the products of the acquired company are an important factor in determining the value of the acquisition, software products are unique and subject to the following factors:

- Even with an industry-leading software product, constant updates and enhancements need to be planned for the product to make sure that it stays competitive. The competition will not stand still.

- There is no such thing as a bug free software product. A plan needs to be secured to make sure that the product can be properly supported.

- New products need to be considered to feed the channel. You can bet that the competition has a plan to do just that.

- Most of what you are acquiring is in the human capital of the development team. These people understand the product, the market/channel, and competition. Without taking care of this asset, the future of the existing product will be in doubt.

A comprehensive analysis needs to be made in regard to all of these factors. Ignoring these factors may diminish the long-term value proposition of the products in the channel.

The factors that need to be considered for an acquisition

First and foremost – it is usually important to insure the longevity of existing success products. The revenue that these products generate should be protected and well planned for. This includes building a plan for product enhancements, customer support via the developers, bug fixes, etc. In addition, a product roadmap should be constructed to map the future versions of the product so that marketing and development can plan appropriately.

Second, part of this plan should include an evaluation of the technical staff in the company being acquired. Careful consideration needs to be made regarding this evaluation – who are the key players? Who has the deep product knowledge that can be used to enhance the existing products? Who has the knowledge to perform product support most efficiently? It’s important to recognize the key people in the development staff and to do what you can to secure this part of the resource pool. Once this is done, a comparison can then be made with any resource overlap with the acquiring company to determine if there are redundant resources.

Lastly, consider where the channel is going in the future and build a plan for new products to complement the existing products. In this way, you can leverage the knowledge and experience of the acquired design team to create new revenue opportunities in the existing channel.

This is a partial list of items that deal with the product(s) being acquired – obviously, there are a host of other issues that need to be considered, including intellectual property issues, product rationalization, team integration, etc. These topics will be explored in future articles.

Conclusion

Acquiring a software company is different than many other types of acquisitions. It may appear that one is purchasing a capital “asset” when buying a company with an established product line and market position, but the software asset is one that requires constant support and enhancement. The human asset that contains the knowledge of the product and the ability to enhance it is the key and is the part of the acquisition that needs to be understood and secured.

Without proper planning beyond the current revenue stream being produced by the acquired company, the anticipated value of the acquisition can be placed in jeopardy. The long-term plan for current product support and additional new product development needs to be part of the plan for any company considering an acquisition. In addition, securing the key talent in the acquired company is crucial to the short-to-medium term success of the acquisition itself.

————————————————————————————————————————--

Kelly Nehowig is President of Applied Logic Engineering, Inc., a Minneapolis-based consulting company specializing in software development products and services. A 26-year veteran of the software industry, he has worked with companies from startups to large corporate clients. Kelly holds a MS degree in Software Engineering from the University of St. Thomas and a BS degree in Electronic Engineering from Minnesota State University – Mankato. He can be reached at kellyn@appliedlogiceng.com.