Pitch perfect: Retuning software M&A

The software M&A market is heating up

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?

A different kind of M&A

Typical playbooks are generic, cross-industry, process and methodology-based. For software deals―fast-paced, complex and transformational―the standard playbook won't work.

Toss your existing playbook

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

The race for competitiveness begins at announcement

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.

Watch your back

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

Seal the deal with a new playbook

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:

• The right valuation: Factoring the target's annual recurring revenues as well as potential revenue and cost synergies. Identify both risks to existing revenue streams and big rocks that could prevent you from achieving synergies early.
• Cultural alignment: Cultural aspects are especially important for buyers outside of the software industry, who may have a larger gap to close.
• Stability of key talent groups: This includes engineering, product and sales, with a focus on early retention plans to keep these critical players in house.
• Product/platform transformations: To maximize deal value, leading buyers start defining their product strategy and developing the underlying product roadmap the moment the deal is announced.
• Anticipated actions by competitors: In this extremely competitive market, buyers need to protect their base business and critical employee groups from their competition, addressing integration and transformation efforts simultaneously.

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.