Good Post on Software Industry Consolidation

Jeff Nolan (SAP Ventures) has an interesting post covering consolidation in the software industry. There are at least three key undercurrents to his post covering background of this sector of the economy, M&A philosophy from the perspective of platform vendors, and the importance and practicalities of post-merger integration within the software space.

Jeff’s pragmatism shines through in this part of his post:

… Probably the single biggest thing you can do with an
acquired company is know what members of the management team and rank-and-file
that will be leaving the combined companies no later than 12 months after the
acquisition. The fact is that when you have large companies buying small
companies most of the people won’t mesh together for the simple fact that
entrepreneurs and people attracted to startups don’t like big companies. So
knowledge transfer and integration becomes a critical success factor.

Although I’ve pointed out some general M&A studies done in the consulting industry here (not to mention another study by McKinsey here [free subscription required] that reveals "that 70 percent of mergers failed to achieve the predicted
revenue synergies, while cost synergies were overestimated by at least
25 percent in a quarter of the mergers"), Jeff’s post is great because it signals some experiences specific to software sector M&A. Clearly, not all M&A deals create an exitus of personnel. In the M&A scenarios that have  been closer to home for me (generally telecom space), one key aspect of many deals is that management typically goes out Day 0 to proactively "re-recruit" personnel – e.g., management assumes that M&A deals create tension that must be relieved. That said, from the people I know who have been involved in M&A in the software space, the day after the deal it is not uncommon for those in the acquired company to have looks on their faces like they are reporting to prison even though their pockets may have been lined with gold.

Steve Shu

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