Consolidation in the software sector continues to increase in velocity as the market matures and investors have capital to deploy. While they create immediate value through market share expansion and synergies, integrating multiple companies always presents significant operational complexity.
In the case of software platform integration, management teams must be prepared to balance customer retention and growth with optimizing the business through synergies (i.e. “changing the parts while flying the plane”).
Accelerated deal timelines make it difficult to have a comprehensive integration plan ready at closing, but devoting time to get this plan in order immediately after close is imperative. Doing so will help retain customers and talent during the critical transition—thus preserving the deal’s potential value.
West Monroe’s December 2020 signature research, High-Tech M&A Defies the Odds, explored the current state of deal making in the industry as well as the plans, concerns, and priorities of both private equity and corporate buyers. Results suggested that deal activity will remain high: 70% of respondents said they plan to acquire as many as two high-tech and software companies over the coming 24 months, with 27% intending to make three or four acquisitions.
In our study, buyers cited deciding on the level of integration (27%) and integrating product platforms (24%) as the two most challenging aspects of recent high-tech and software deals (Fig. 1).
Sellers are establishing aggressive timelines and expect value quickly. We asked about the time allocated for post-merger integration, and more than one-fifth of respondents said they expect integration to take less than six months; more than half of respondents allow only 7 to 12 months for what can be complex initiatives.
In our experience, such timeframes can be overly optimistic, particularly for deals that involve consolidating or integrating platforms or shifting customers to a go-forward set of products. Platform consolidation carries the highest degree of complexity among types of software acquisitions (Fig. 2). While the average may fall in the 6- to 9-month range, integration can take as long as 18 to 36 months, depending on the size of the businesses and the technologies involved.
Many companies tend to shortchange or rush the integration planning process in the interest of trying to realize benefits faster. Devoting sufficient time for planning, however, not only smooths the path to realizing those benefits but also prevents companies from moving quickly in the wrong direction and allows them to set realistic expectations about the incremental milestones and overall timeline.
Planning—which includes more than just estimating timelines and establishing a one-time integration budget—requires extensive cross-functional collaboration (e.g. how do the professional services and customer support functions need to be redesigned to support customer migrations?) in order to plan out sequencing, dependencies, and internal/third-party resourcing.
It’s important to align on a platform integration strategy as early in the process as possible. A clear integration strategy and sufficient planning will create a common understanding of the integration cost and timeline, allow for more informed commercial conversations with customers, and accelerate deal value.
There is a critical point immediately after the close where you will need to go deeper into certain areas. In our experience, the five areas below will require immediate attention to make sure your merger is on the right track to meet goals.
1. Product strategy
Validate the product and go-to-market strategy for the combined business as early as possible. These strategies inform the rest of your planning process and define the resources, time, and costs necessary to achieve your future platform. If your go-to-market strategy is to be significantly different that the present one, significant work will be required to get it up and running.
Planning should be grounded in deep understanding of both market needs and current feature gaps. That analysis will drive strategies for product differentiation through features, pricing, and packaging. This, in turn, will guide rationalization of current offerings—for example, we will invest in and build A, ramp down investment in B, shut down C, or integrate these features of D into E.
In some software integration and transformation scenarios, such as our work for GlobalTranz, employing a minimum viable product approach can help expedite a new strategy while building for the future.
2. Commercial strategy
This should be developed in tandem with the work above so you can apply insight about the combined customer base to inform the product strategy and go-to-market strategy. It will also guide subsequent decisions about account teams, structures, and processes for supporting the combined business and software platform.
This is detailed work that involves going customer by customer to identify retention risks, understand contractual obligations that may need to be accounted for in consolidation plans, assess cross-selling or migration opportunities, and alignment of customer segments with potential product strategies.
In light of new pricing and packaging (step one), you will need a clear approach for re-contracting current customers and for monetizing new revenue streams. For transactions that will retain multiple existing platforms, there should be a clear cross-selling plan in place that drives opportunities in both directions and provides clear direction for funneling opportunities to the sales organization.
Ultimately, this process should produce an account management plan and roadmap for transitioning customers and commercial team activities to the future model.
3. Technology strategy
While due diligence will include close scrutiny of technology and architecture, an even deeper review should begin immediately following the close—particularly if the diligence timeframe is compressed. This can help surface additional issues that must be addressed for integration to proceed—In our study, some 60% of respondents said they discovered a cybersecurity problem at an acquired company during the post-deal planning and integration.
This review should be broader than platforms and enterprise architecture. It provides critical input for designing the future platform, planning technical consolidation (including technical designs, timelines, and resources), planning for technical customer migration (if necessary), and consolidating back-office IT resources.
Immediate steps should involve detailed technical product assessments to understand gaps and technical debt as it pertains to product architecture, infrastructure, security, and user experience, as well as detailed scalability testing to validate the ability to support commercial and growth plans.
4. Operating model and organization structure
The product and commercial strategies are usually tied to driving top-line revenue growth. Most transactions also present opportunities for margin improvement by capturing synergies in processes and people.
This set of activities should start with reviewing business processes and developing efficient future workflows. Reviews should encompass the lead-to-close, order-to-cash, procure-to-pay, plan-to-report, and recruit-to-retire processes, as well as software-specific processes such as the customer success and support processes responsible for renewals, upselling, implementation, and service.
You will also need to evaluate and develop a plan for the back-office IT applications that support the combined business. Additionally, many growth-stage companies haven’t paused to optimize margins in SaaS platform cloud operations (host and run). Where relevant, this needs to happen early in the investment period so that costs scale efficiently—and not at the same rate as revenue—as the combined company grows.
One of the most challenging exercises is consolidating organization structures with care toward retaining key talent. Plans should address consolidation of core research and development, implementation, and support teams—including product management, sales, marketing, professional services, customer support, and corporate IT resources—as well as overlap in general and administrative functions. Your focus should be on creating the right organization chart—with optimal spans and layers—and filling key leadership roles.
Some mergers involve a short-term reduction in force—often within the first days or weeks—to eliminate duplicative roles. But developing the optimal operating model will take longer, so it’s important to make quick decisions with an eye toward the future operating model. For example, consider the resources that will be required for both one-time and integration activities as well as recurring operational activities—and make sure you have sufficient resources for both. It may be necessary to supplement internal resources with contractors or outsourced services for integration-specific activities.
The cultural people aspects of mergers are easy to overlook in the race to bring a consolidated product offering to the market. But care and attention to the soft factors can and do affect value and growth potential. Organizational design and change management expertise will be essential. Our recent work for the merger of equals between two leading cloud software providers focused on creating an organization structure and leadership assignments that reflect growth goals and go-to-market strategy. As a result, the company was able to retain 100% of targeted talent and position itself for short-term growth.
5. Financial plan
Creating financial value through synergies and new commercial opportunities is central to the merger process. The product, commercial, technology, and operating model strategies provide key inputs for developing financial models. Financial planning should include analysis of the one-time costs and resources associated with executing the merger plan. It should also include a model of the operating costs and resources required to run the business once it has made the transition to a future operating model and captured the relevant synergies.
For more complex mergers with that require extended timelines and/or a surge of resources, it may be necessary to develop an interim financial model that estimates the costs required during the transition period. Buyers can face a host of challenges during this timeframe that they may not have expected—from ensuring that the C-suite and board have clear visibility into actual versus planned performance to avoiding financial penalties related to deal and lending covenants. Sufficient upfront planning can help avoid surprises as the integration period progresses.
Platform integration involves detailed work in all of the areas and typically takes longer than other types of software transactions. It’s important to prepare for the complexity by having a solid plan and to set expectations accordingly.
Even if planning doesn’t speed up the integration process, it will ensure that your organization goes into the process with eyes wide open—thus increasing the chances of success.