Strategic Acquisitions for Software and Technology Companies

Acquiring new products or whole companies is a popular activity for many growth and market-share oriented companies. Is it a good idea?

Well, as I often say--it depends. I get involved in company or product acquisitions quite often in my consulting practice. There is nothing inherently good or bad about acquisitions in the technology business. However, there is nothing inherently bad about opening a restaurant, either. Nonetheless, a very high percentage of restaurants (I've seen figures as high as 90%) fail within 5 years. The failure rate for acquisitions may not be quite as high as for restaurant startups, but technology acquisitions are also judged to be failures at shockingly high rates. Caution should rule when approaching either of these very popular activities. As I'm fond of saying about success or failure in any complex business activity--the devil's in the details.

Common Motivations for Acquisition Activity

Let's examine the common reasons that acquisitions are considered in the first place:

1) It's exhilarating and "sexy" to buy another company
2) Growth for growth's sake (often pushed by investors)
3) The belief that buying a competitor is the ultimate "victory"
4) A consolidating market (often commoditizing) where there is only room for a few large players
5) Diversification
6) A great strategic fit where 1+1 truly equals 3

As you might have guessed, reasons 1-3 above aren't great justifications for such a risky activity. Number 4 can be a good justification, but often this is given as the rationale, when the actual market case doesn't truly support it. Number 5 can be a good or bad rationale, depending upon whether the business case really calls for diversification--or if focus would make more sense. Number 6 is by far the best reason to acquire a company, particularly if you aren't an industry giant, pitted in a death match with another titan of your marketplace.

So let's say you've actually thought it through, and have used sound analysis and judgment in deciding to pursue an acquisition. Congratulations for passing the first test--but there are still myriad things that can trip you up, on the way to acquisition success:

Great Ways to Fail

First acquisition done "on your own"--I strongly urge all first time acquirers, whether of the product or company variety, to seek assistance. Acquiring a company and even a product is very complex, with a lot of places to trip up. Retaining an experienced hand that has seen and gone through the mistakes before, can prevent you from the most expensive education of your life.
Bad cultural fit--In the excitement of an acquisition or a merger, people have a tendency to not look past the surface. It's much like dating an attractive potential mate, and proposing based upon infatuation, without establishing whether there is common ground in the way you live your lives. This is the business equivalent of marriage, folks. Compatibility in business philosophies and practices is crucial--and often overlooked, until after the fact, when everything is unraveling.
Poor organizational integration-- Even with an excellent evaluation of potential partners, a great many mergers fail based on the execution of integrating the organizations. That's because it is HARD. You are generally merging two organizations with disparate operating styles, as well as overlapping functions and people. Fear, uncertainty and doubt of the individuals involved can by ITSELF scuttle a potentially great fit. This area is often quoted as the reason most acquisitions fail.
Poor product integration--This is the reason a lot of acquisitions in software and high tech should be called off early in the process. It is often very difficult to rationalize how you are going to support two different code bases or technologies, aimed at the same market. The plan usually call for integrating them over time, but that often proves to be very difficult from a technical perspective. This is a real red flag when buying a direct competitor. Yet the price of the merger in high tech often assumes that the products can be integrated acceptably, without losing customers from either of the existing products. Unfortunately this is usually a very tall order
Paying too much--Price plays a big role in software and technology acquisitions. Due to high growth rates and the perceived need to move quickly in fast-growing, competitive technology markets, acquisitions are often priced in multiples of revenue. This is in contrast to the more conservative multiples of EBITDA in other less dynamic industries. Often the target isn't even profitable yet, but still commands a high price-to-revenue multiple, due to the "hot" nature of the market space, and perceived value of the acquired technology. This high price puts a severe strain on downstream execution of the merger to be "perfect", as discussed above.

So with all of the landmines out there in the acquisition arena, along with the high failure rate, is it simply nuts to consider acquisitions? Doesn't it make sense to just stay away from them? NOT NECESSARILY.

Sound Approaches to Pursuing Mergers

Buying innovation--This often happens when companies reach a certain size; they simply lose their ability to innovate. Rather than innovate internally, they do so by acquiring small companies with market-changing technologies, which may not have the resources to fully exploit in the marketplace on their own. Even though multiples here tend to be high, risk is somewhat mitigated relative to internal Research and Development that might not "pan out", and the size of the acquisition is often very modest, relative to the resources of the acquirer. This is an example of a true 1+1=3 strategic fit. This strategy has been used with great success by Cisco, Microsoft, and many other large companies with successful acquisition programs.
Buying companies or products that truly fill a hole in your offering--While some companies tend to overuse this as justification, acquisition of a reasonably priced company or product at just the right time, can mean the difference between continued growth or inevitable stagnation.
Buying undervalued assets--This is harder to do in high tech than in other industries; high tech companies have a habit of overvaluing their businesses and technologies. But an executive team with a key eye for a bargain can often pick up a diamond in the rough, for example a division that has suffered because it isn't a good fit with the parent company's core business
Truly appropriate diversification--Sometime you run out of steam in your current market, and the amount of cash flow generated by your current business dictates that an investment in another growth area may be prudent. The key here is to pick a market segment adjacent to the existing business, or at least a business that the management team can easily adjust too. However, management teams often are over-confident and deceive themselves, and end up investing in an area where they really don't belong.


I could go on and talk more about acquisitions for a very long time. But instead of putting you all to sleep, let's begin a dialogue on this topic. Inform us of your own Merger and Acquisition stories, best practices, and cautionary tales.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

The Mechanics of Email Marketing

There are many different possibilities for technology and software companies, when it comes to formulating a marketing mix. I've written before about some of my favorites. One method that can be a big winner, if done well, can also be a big loser if done poorly. I'm referring to email marketing. If you want to be successful, you need to do it very well, as a result of SPAM and the general bursting of everyone's email inbox these days.

Why Email Marketing?
Email marketing can be so productive for a company, because unlike more passive forms of online marketing (ex: PPC advertising, Banner Ads), you can usually target you audience very effectively. This is especially true if you are using an in house list; by definition, these are prospects that have some reason to have an interest in your products. In B2B marketing, there is an abundance of excellent niche lists available for rental, to use in a targeted campaign. In B2C they aren't quite as good overall, but there may be very good lists available for a particular category.

Like all other forms of online marketing, another primary benefit to this method is the ability to measure results with great accuracy, granularity and speed. Lastly, you can make a very big impact quite quickly, unlike other online methods which may fit more into the "steady as you go" category.

The Elements of a Successful Email Campaign
So if "doing it right" is so important, just what are the important things to concentrate on, to achieve success in email marketing? Let's take a look at some of the most important elements:

Relevancy
First and foremost, your email must be relevant to the people who are receiving it. This is the great problem with the email marketing universe today, especially when considering the Spammers. Scattershot emails to every name that you can get your hands on not only won't raise your sales; it will ruin your online reputation, and prevent you from effectively marketing online in the future. It's been said by others that the difference between SPAM and legitimate commercial email is RELEVANCY. I firmly believe this. If your offer resonates with the list that you send it to, you will receive very few complaints.

The List
After relevancy, the next most important thing is the list. Absolutely do send your message to a list of folks that you have good reason to believe will be interested in what you have to offer. This is called target marketing; it is good practice across ALL marketing media. In email marketing--IT'S ESSENTIAL.

The Offer
Next comes the offer; often this is the most critical thing that you have a lot of control over. You need to remember that in email marketing, you are "going to the people". They aren't coming to you--actively looking for your product or service. As a result, your offer needs to be very aggressive to get their interest, and to compel them to act in the manner you desire. I always say that in direct marketing you want to make your very best offer. In email direct marketing, make them an offer that is so aggressive, it actually makes you wince a bit!

Creative
The above categories are the most critical to success. If you don't get them right, nothing else will matter. However, it's still very important to properly execute your relevant offer to the proper list. Even if you've got these elements formulate properly, poor creative execution can still lead to failure. My advice here is to make the email look like an email--not a web page. People's expectations in an email message are very different from visiting a website (and attention spans are short enough in web-viewing!). I recommend that you keep your message simple, direct and relatively short. Feel free to include some attractive, eye-catching graphics. But remember, this is direct marketing--not an art project. The most recent research suggests that email graphics has no effect whatsoever on response rates. It's all about the copywriting. Make your copy compelling, and get to the point very quickly--there isn't much time before the "delete key" get punched.

Legal
The legal aspects of marketing via email are important, and quite a bit more restrictive, relative to any other form of direct marketing. So make sure you are aware of the laws which apply to your message--they vary from country to country. In the US, for example, the CAN-SPAM act requires an honest subject line, "remove requests" instruction, and a listing of the sender's physical address--among other things. In some cases there are also state laws that apply. In Europe and other countries, the requirements can be far more restrictive, sometimes going so far as to require "opt-in" permission before any message can be sent. So be sure to research the local laws and comply with them at all times. To do otherwise risks ruining your online reputation--or worse.

Deliverability
This is one of the most difficult aspects to this particular direct marketing method. The advent of SPAM has created many barriers to delivering even the most welcomed messages to email inboxes. This was necessary, of course, for the preservation of the ability to use email at all. But deliverability is a very challenging, every changing scenario that has morphed into a marketing specialty of its own. There are many good places on the Web to assist you in getting your email delivered to your prospects. Return Path and Habeas are two of the more well known new companies that specialize in this area. I have used a free tool called SpamCheck to great effect over the last year, in screening my messages for deliverability problems. Contactology also has a great free Spam checking tool, as well as a turnkey service which enables you to easily create highly-deliverable email messages. EmailReach is another company that has some deliverability great tools. They aren't free, but they do offer a 24 hour free trial for their service.

Continuous Measurement & Testing
The last thing I want to mention, which should be part and parcel to any successful email program, is measurement and testing. Since email is an online medium, it's easy and cheap (or free) to measure your results. Frankly, doing any form of direct marketing without measurement is dumb. Online direct marketing with measurement is criminally dumb. There is just no excuse for it, other than laziness. Direct email marketing works best when it isn't considered a "single-shot" campaign. Each drop should be part of an overall campaign aimed at continuous improvement. Multiple elements of your message should be tested and measured with each drop. If you do this, you WILL improve your results as you go--and likely will end up with a highly successful, and repeatable, marketing method to help drive your company's growth.


Wrap Up
That's my review of the nuts and bolts of good email marketing. Let's hear from some of the other experts out there, on your best email practices. Post a comment so we can discuss this important marketing method in depth.

Phil Morettini
PJM Consulting
www.pjmconsult.com