When a large software
company makes an acquisition in a particular niche, several other comparable
acquisitions soon follow. This article discusses this market dynamic and the
importance for owners of similar software companies to reevaluate their exit
plans.
Our
firm was engaged as a merger and acquisition advisor in 2010 to sell a Content
/ Document Management Software Firm. We put together a database of likely
buyers in that software category and began our contact process. Fast Forward to
early 2014. We have been engaged by a second Content / Document Management Firm
to sell their software company. From our earlier engagement, we dusted off our
database of mid-market software companies in that space and began making our
phone calls.
A very interesting thing happened. 40% of these middle market
software companies had been acquired by one of the large software companies. We
would call one document management software company expecting the receptionist
to answer by the company name in our database. Instead, we got, "Thank you
for calling OpenText." Next call, instead of the expected company name, we
got an EMC Company. Another call and this time, "thank you for calling
Oracle." Two calls later, we reach an IBM Company.
Wow. Between mid 2010 and early 2014, there was a buying spree
by the enterprise software vendors shoring up their product offering to become
a much more comprehensive offering, now called ECM or enterprise content
management. It was almost like a heavyweight fight - IBM punches, EMC counters,
and Oracle lands a blow while OpenText dodges a punch.
For the midsized software companies in this space, these were
exciting times. This rapid consolidation and active buying caused the
transaction values to increase rapidly. Once the enterprise companies have
added what they needed, however, the buying stops, the market returns to normal
and sellers no longer command a premium price. Now the bad news. If you were a
mid-sized competitor of the acquired companies, you are now competing with very
large, powerful competitors. They will dwarf your company in terms of sales force
size, marketing resources, brand awareness and pricing power. Their product now
becomes the safe choice in a head-to -head competition with yours.
To now compete effectively will require even more skill. Your
firm can continue to provide outstanding service and responsiveness. You can
provide the small company customer attention that many customers require. You
can be nimble and innovate with new products and features as another way to
successfully compete. You often hear the stock market pundits say, "the
trend is your friend" or "don't fight the trend." There is a
certain wisdom to this sentiment. If you are in a software category that
suddenly has become the target for the big software vendors, you may do best to
exit according to the market conditions rather than your original retirement
schedule.
Actually, the buying company will most likely want you to stay
on board for a period of time to transfer customer relationships and
intellectual property. So you can take your chips off the table today at an
opportune time for rich valuation multiples and then retire a few years later.
If you are younger, you can secure your family's financial future, work for the
new company for a few years, gain valuable experience and then exit. Now you
are ready to launch your next great idea. This time it will be far easier. You
will have a large base of resources and influential contacts. Also the venture
capital guys might even give you money under reasonable terms. Home Run, touch
em all!
Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To view our lists of buyers and sellers click to visit our Web Site MidMarket Capital
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