In the first quarter of 2021 there were 724 software M&A transactions. 354 of these deals involved SaaS companies SaaS. Valuations are at an all-time high. The median Q1 2021 Enterprise Value/Revenue (ttm) multiple was 14.2x. Deals in the Dev Ops and I.T. Management segment had a median EV/Revenue (ttm) of 31.5x. Private equity accounted for 50.9% of transactions. As a former private equity M&A exec I have analyzed over 500 M&A candidates, conducted over 50 due diligence investigations, closed four major and one minor acquisition, and conducted eleven divestitures. In my experience, prudent product management leaders should understand how M&A execs analyze and assess product management organizations.
Understand the M&A Exec’s Perspective
The first challenge for a product management leader is to understand the potential acquirer’s M&A executive’s perspective. Product Management is not a standardized function. The roles and responsibilities of Product Management can vary significantly from one organization to another. For example, the line between product management and product marketing can be very different in some companies. A M&A exec will see your organization through the eyes of their own organization. A good product management leader will drill in and understand how product management is structured and operates in the M&A exec’s organization.
Most companies that grow by acquisition have a certain way they approach it. Do they focus on acceleration deals (acquisitions that speed a company’s entry into a market) or do they focus on consolidation deals (acquiring companies in their core market to increase market share, geographic coverage, and profitability). They also have standardized ways of integrating acquired companies. Options include standalone strategic business units, hybrid strategic business units, or full business integration. For more information check out Product Managers: How to Survive an Acquisition.
Understand When the M&A Exec First Engages with You
The second thing to focus on is when the M&A exec first engages with your organization. Generally, the earlier in the M&A process they engage with your organization, the better. The following chart describes at a high level, the steps in a typical tech M&A project. Each company tends to have their own playbook for M&A deals. Based on my past experience I have summarized the typical process steps in an M&A project. You should talk with people in your company to learn if there is a formal process in place for deals.
To learn more check out M&A Basics for Product Managers. Part III: M&A Process.
The earlier in the process the M&A exec engages with your organization, the more input and impact you can have. If you are not engaged until the transition stage, all of the major decisions will have been made without any input from your team.
In my experience I always tried to engage product management as early as possible. Product leaders have tremendous insights into the market, competitive landscape, and internal organizations like Development, Marketing, Sales, Customer Support, Professional Services, Finance, and Legal. I could leverage these insights without having to get people from all these functions involved early in the M&A process to maximize confidentiality.
It All Starts With Your Numbers
The first thing a M&A exec will see are the numbers in the standard management reports produced by your organization. Prior the start of Due Diligence the M&A team will submit what is known as an information request to your organization. The request describes the information they want to review during the due diligence process. Most acquirers have standard checklists for legal and financial due diligence. Many have them for product management. A typical request could include:
|1. Corporate||3. Customer Service|
|1.1 Lifetime Value (LTV)||3.1 Key Stats|
|1.2 Customer Acquisition Cost (CAC)||3.2 Customer Service Ticket Type & Severity|
|1.3 LTV/CAC||3.3 Customer Effort Score (CES)|
|1.4 CAC Payback||3.4 Customer Service NPS|
|1.5 Net Promoter Score (NPS)||4. Marketing|
|1.6 Customer Moneywheel||4.1 Website Analytics|
|1.7 Customer Tiering||4.2 Search Console Performance|
|1.8 Bookings vs Revenue||4.3 Ad Performance|
|1.9 Churn Analysis||4.4 Marketing Funnel Performance|
|2. Sales||4.5 Market Size|
|2.1 Booking Trends||4.6 Market Growth Rates|
|2.2 Sales Rep Performance vs Quota||4.7 Market Share Estimates|
|2.3 Sales Rep/Product/Moneywheel||5. Development|
|2.4 Pipeline/Forecast by Product Line||5.1 Agile Backlog Analysis|
|3. Customer Service||5.2 Agile Velocity|
|3.1 Key Stats||5.3 Burndown Charts|
|3.2 Customer Service Ticket Type & Severity||5.4 Code Test Coverage|
|3.3 Customer Effort Score (CES)||5.5 Escaped Defects|
|3.4 Customer Service NPS|
For more explanation of these metrics check out 25 Key Metrics for a Product Management Dashboard
The structure and contents of a product management information request will often mirror the types of standard product management reporting in the M&A exec’s organization. The above list is not exhaustive, but it does illustrate the type of data a M&A exec would be interested in. A typical exec will want to do as much ‘side by side’ comparisons as possible.
It is critical as a product management leader to know the numbers associated with your organization. Not only do you need to know he numbers, you need to understand and be able to explain why the numbers are trending over time.
Product Management Qualitative Assessment
An organization’s metrics or ‘numbers’ tell an important story. Executives are trained to see he world through numbers. M&A execs will conduct a number of qualitative assessments as well. Often these assessments will be more impactful than the quantitative assessment metrics can provide.
M&A execs will look at how your product management team is organized. How many VPs, directors, managers, senior product managers, and associate product managers are there? Do product managers handle n entire product, a portion of a product, or multiple products? Are there product managers for specific international geographies? What is the typical profile/background of product managers? Former developers? QA? Consultants? Customer support? How many years of experience do they have? What academic credentials? Are specific certifications required (SAFe, Pragmatic Marketing, 280 Group, etc.)? The M&A execs will compare your organization to theirs to understand how well the two could be integrated.
They will also look at total compensation packages. This is often an area of unexpected friction. If your organization has significantly higher salaries, bonuses, stock options and benefits plans it could cause an issue with the acquirer’s product management team. If the reverse is true, the M&A team will have to find a way to harmonize the compensation situation over time. Large differences in compensation systems drives a lot of unplanned attrition post deal closing.
A third area M&A execs will examine closely is the scope of product management responsibilities and how it compares to their organization. Is product management primarily focused on Development or does it also concern itself with topics like pricing and packaging, go to market strategy, sales support, management of escalated customer support issues, etc. Generally in early stage markets (visionary, early adopters, early majority) product management tends to be Development focused. The major emphasis is on the evolution of product capabilities. In later stage markets (late majority, laggards) product management organizations tend to have a broader set of responsibilities. They focus on maximizing and sustaining revenues, profits, and market share. If an acquirer and a target have fundamentally different views of the scope of product management responsibilities it can be the source of many post-closing integration problems.
One topic that can drive a lot of differences is the scope of product management responsibilities is the product management process or framework used by an organization. If the acquirer is a Scaled Agile Framework (SAFe) shop and the target is a Pragmatic Marketing or 280 Group Optimal Product Process or even a Lean Startup shop, there are going to be conflicts. A reasonable compromise will have to be worked out or the M&A team risks alienating a critical constituency.
Product Management Effectiveness Assessment
At the end of the day, a M&A exec is going to combine their quantitative and qualitative assessments to determine how effective your organization is and could be once the merger is complete. A M&A exec will consider a number of factors.
Achievement of Corporate & Departmental Goals
The first thing they will assess is the degree to which product management either helped or hindered the achievement of corporate and departmental goals. Such goals can include increasing enterprise value, increasing revenue growth rates, increasing profitability, etc.
Often product management organizations can be ineffective at achieving these types of goals and lead a company down a bad path. Many companies that are looking to be acquired have run into some type of major problem that is jeopardizing the company’s success or even existence. A common occurrence in later stage companies is making a bet on a new product to reverse declines in revenues or profits. These types of ‘Hail Mary’ initiatives can consume extreme amount of resources, often to the detriment of existing products and services. Product management is often the source of these new product ideas, and their biggest champions in the company. When the new product fails in the marketplace, the damage to the firm’s reputation and existing customer base can be unrecoverable. Late stage companies are not the only ones to fall into this trap. Early stage companies that fail to find product/market/price fit often persist in their efforts until funding is exhausted.
A core responsibility of product management organizations is to develop and extend effective competitive differentiation. This is accomplished through the judicial selection of product features to build, the development of effective positioning and messaging, and the enablement of the whole organization (marketing, sales, support, services, finance, etc.) to execute the sales and support of the product. Product management needs to understand what product/organizational capabilities are required to effectively differentiate their offerings from the competition.
Product management needs to ensure that whatever products/services are released to the marketplace are of the best quality. Balancing the priority of implementing functional/non-functional requirements is always a challenge. The CEO of a famous top 10 enterprise software firm once said “I’d rather have a shitty product and a great salesforce than a great product and a shitty salesforce.” This same CEO grew his company by over 500% in less than 10 years – by acquiring companies who had let the quality of their products slip while they chased new initiatives that never paid off.
The pace of mergers and acquisitions is accelerating due to the record valuations in today’s market. The chance that your organization could be acquired is greater than ever. Prudent product management leaders should understand how M&A execs analyze and assess product management organizations. This could not only help maximize the valuation of their company, but help them preserve their own role in a merged enterprise.
Also published on Medium.