The objective of this post is to provide product managers with some practical insights into the overall merger and acquisition process. I have been involved in product management for over 15 years. As a corporate development executive, I have led five major acquisitions and eight divestitures. This is the first of a three part series. It will focus on the major types of acquisitions. The second will focus on roles and responsibilities in the M&A process, especially for product managers. The final installment will walk through the major process steps in a typical M&A deal.
Before we begin I would like to talk about confidentiality and non-disclosure agreements. If you are asked to participate in a M&A project it is very likely that your company has signed a non-disclosure agreement that you will be bound by. You must go to great lengths not to disclose anything about the project, even to friends and family. Insider trading is a real crime and the feds regularly prosecute it. Even if your company is not public, you still need to be vigilant. Talk about M&A can cause fear and distress among your fellow employees. Acquisitions create change and some people do not react well to change. If you ever have a question about who you can or cannot talk to about your involvement in a M&A project talk to your boss or the person who brought you into the process for guidance.
Types of M&A
There are three basic types of Mergers & Acquisitions – Acceleration Deals, Diversification Deals, and Consolidation Deals.
Acceleration deals are opportunities that significantly accelerate a firm’s ability to enter and grow in a market. They are the Buy portion of the typical Buy-Build-Partner decisions product managers make every day.
For example in 2003 the company I worked for acquired IPNet Solutions – a provider of Internet EDI communications solutions. Inovis was an EDI company – they had software products, outsourcing services, and a Value Added Network (VAN) that supported the Electronic Data Interchange needs of enterprise companies, midmarket firms, and small to medium enterprises. In 2002, the EDI market underwent a fundamental change. Instead of relying on expensive Value Added Networks, dial up modems, or leased lines to send and receive EDI documents (purchase orders, shipment notifications, invoices, etc.) a new communications technology known as AS2 began to disintermediate tradition EDI communications. AS2 offered secure, non-repudiable communications for free over the Internet. Customers only needed to buy certified AS2 software and they could bypass the traditionally expensive EDI Value Added Networks. In 2002 the EDI market was disrupted by AS2 when Wal-Mart decided to move all of its EDI communications to AS2. While Inovis had the capabilities to develop, market, and sell its own AS2 solution, they decided to accelerate their entry in the market by acquiring IPNet Solutions. They immediately gained access to market leading technology, expanded their revenues and profits, and gained some very capable technologists and sales people.
Another type of acceleration acquisition is the acqui-hire. Acqui-hires are deals that are primarily focused on acquiring specific technical talent, versus entire businesses. Acqui-hires typically occur in the visionary stage of the Technology Adoption Lifecycle. They are usually firms that have exhausted their seed and angel funding and struggled to raise a Series A round of funding. FaceBook’s acquisition of Eyegroove, Endaga, and Vidpresso are all examples of acqui-hires. Acqui-hires allow a company to accelerate the development and delivery of new technology at a lower risk than developing it themselves. While acqui-hiring was popular from 2007-2015, the pace of acqui-hire deals has slowed significantly.
Diversification deals focus on expanding into new or complementary markets. Let us assume that your firm is currently in the warehouse management market, which is part of the overall supply chain management market. In supply chain management there are five major sub markets – supply chain planning, supply chain manufacturing, supply chain distribution, supply chain sales, and supply chain services. Warehouse management is part of the supply chain distribution segment. Other sub-segments include inbound logistics, outbound logistics, transportation management, vendor managed inventory, global trade management, etc.
When considering diversification opportunities you want to look for sub-markets/solutions/companies that complement your existing solutions. Your current customers should use a targeted company’s solutions. The buyers of the solution (economic, using, and technical buyers) should be similar to the buyers for your solutions. Your existing solution should provide either inputs to the targeted solution or process outputs from your solution. Diversification opportunities provide a way to accelerate your revenue and profit growth at a significantly lower risk than developing, marketing, and selling your own solution.
Consolidation deals focus on acquiring and integrating companies that offer similar solutions to your current solutions. Basically you use your current business as a platform and consolidate non-critical business functions like marketing, customer service, professional services, finance, HR, accounting, facilities, data centers, hosting operations of acquired companies into your platform. Research & Development as well as sales tend to remain as standalone units.
In the 1980s and 1990s companies like Computer Associates, Platinum Technology, and Sterling Software were classic consolidators. I was the Group VP Business Development for Sterling’s Application Management Group in the late 1990s where I was responsible for a number of acquisitions and divestitures. In today’s market companies like Oracle, Gores Group, and OpenText are active and successful consolidators.
Consolidation typically occurs in the latter stages of the Technology Adoption Lifecycle – usually Late Majority or Laggards. It is predicated on the assumption that a company’s expenses can be significantly reduced through the consolidation of non-critical overhead functions. Also, economies of scale can be realized through the integration of marketing, sales, operations, and professional services and the cross selling of products and services into the assembled customer base. The acquiring company obtains the benefit of increased revenues and profitability.
While I was at Sterling I played a key role in the consolidation of the enterprise application development tools business. Sterling entered the enterprise application development tools business in 1994 through the acquisition of KnowledgeWare, Inc. KnowledgeWare had a suite of tools that supported Information Engineering-based Strategic Planning, Analysis, Design, and code generation. KnowledgeWare’s tools focused primarily on large scale IBM mainframe systems. In 1997 Sterling acquired Texas Instruments Software business. This expanded Sterling’s revenues by over $200 million with direct operations in 18 countries and distributors in an additional 23. Sterling now had the dominant market position in mainframe and Unix based environments. In 1998 Sterling acquired Synon Corporation. Synon was the market leader in application development and code generation tools for the AS/400 / iSeries platform and Windows. In 1999 Sterling completed their acquisitions in the tools space through the acquisition of Cayenne Software. Cayenne was a leader in application development tools for real time and embedded systems, as well as for complex relational databases (Former Bachman Information Systems). As a result of all these acquisitions Sterling’s Application Management Group grew to $357 million in revenue and $89 million in operating profit in 1999. They had the leading market position in application development tools for IBM mainframes, Unix, Linux, AS/400 & iSeries. They had a minor position in the Windows and Windows NT platforms.