Pitch perfect: Retuning software M&A
August 23, 2019
August 23, 2019
With buyers from both inside and outside the industry, the software M&A market is intense. Last year broke records, both in number of transactions and total deal value.2
The buyer can be a large software enterprise that needs to stay on the leading edge. But it can also be a large company from a different industry looking to expand its capabilities in technologies such as business intelligence (BI), artificial intelligence (AI) and data analytics at speed.
These software deals are a different kind of M&A. Planning timelines are short. Post-deal integration is tricky. Competitors launch countermeasures the moment deals are announced. With the landscape shifting so fast, how can boards and management successfully plan for and execute these deals?
Typical playbooks are generic, cross-industry, process and methodology-based. For software deals―fast-paced, complex and transformational―the standard playbook won't work.
62%
Almost two-thirds of software buyers are from outside the sector.
33%
Software deals on average close a third faster than non-software deals.
Key milestones are changing in real time and deals are closing at speed. Our analysis revealed that, on average, software deals closed in 76 days from announcement, while non-software deals closed in 114 days.3 Furthermore, shareholders, customers and employees all expect more to be done in a short time period post deal announcement. To keep pace, M&A playbooks must be customized and flexible, with timelines measured in days and weeks over months.
For buyers outside of the industry, software deals should be considered a form of a "digital deal," in which the acquiring company pursues technologies or capabilities it does not possess. These deals require a new, customized approach. However, our research indicates less than half of executives (49 percent) use a different playbook for digital deals.4
Transformation is such a critical deal priority that nearly half (45 percent) of software deals in the last five years were "transformational" in nature, citing IoT, cloud and automation as key deal drivers.5
Ironically, software deals close so fast that executives are inclined to put off transformational initiatives just to get the deal done. For example, some major software deals we observed have not included journey-to-cloud planning, which can prevent a fast track to competitive transformation.
Software M&A plans need to include the basics as well as outline the transformation needed to realize value and capture the hearts and minds of investors and key talent. Executives and integration leaders need to find the right balance of speed and thoughtful decision making about products, talent and other key variables.
"Despite every software deal being different, they do have one thing in common: Growth-related factors should be prioritized over cost-focused factors."
—SVEN WAHLE, Managing Director – Accenture Strategy, Mergers and Acquisitions
Many competitors are well-funded. Software company acquirers must go up against behemoths as they are looking to develop industry-relevant products and services anchored on megatrends like BI, automation, cloud, IoT, AI, machine learning and 5G.
They must also protect talent, who will jump ship quickly if they don't believe in the future. Recent surveys indicate software companies face higher employee turnover than any other industry―with the highest attrition rates at the most critical, in-demand roles.6
A successful software deal requires a proactive plan—pre-announcement—so that the business won't suffer the same fate as the 38 percent of software company acquirers that saw a market cap drop within the first year of deal closing.7
1:4
The software industry faces the highest attrition rates at the most critical roles.
38%
Many software acquirers see their market cap drop within the first year of deal closing.
Software deals are unlike any other. And different types of buyers will focus on different actions depending on their objectives. Boards, financial sponsors and management should all aim to prioritize growth-related factors such as revenue synergies, product development, customer retention and talent selection over other cost-focused factors.
All buyers must tackle software acquisitions differently, both pre-deal and post-deal. Forward-thinking leaders will customize their M&A playbooks to address key software-specific risk factors such as:
1Accenture Strategy analysis of S&P Capital IQ data, 2019. Included in the analyses were all M&A transactions exceeding US$250 million from 2015 until mid-2019.
2S&P Capital IQ, 2019. All deals exceeding US$250 million.
3Accenture Strategy analysis of S&P Capital IQ data, 2019.
4Accenture Strategy, "M&A: From art to science," 2018.
5Accenture Strategy analysis of S&P Capital IQ data, 2019.
6Michael Booz, "These three industries have the highest talent turnover rates," LinkedIn, March 15, 2018.
7Accenture Strategy analysis of S&P Capital IQ data, 2019.
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