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Tips for a successful tech M&A

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Whether it’s expanding into new territories and markets or taking on new product lines, merging or acquiring another business is a strategy that can be hugely rewarding.

In the case of tech firms, it can lead to the acquisition of entirely new intellectual property, essentially allowing a business to leapfrog the competition with an injection of extensive research and expertise.

But M&As can also be fraught with difficulties. And even the biggest of companies can have problems. Back in 2014, Google sold Motorola Mobility (the handset part of Motorola) to Lenovo for $2.91bn. The sale came just two years after Google bought Motorola Mobility for $12.5bn. A considerable paper loss, then, but Google got to keep a range of Motorola patents.

It’s important to remember that M&As aren’t just for mega-corporations. Lots of companies have their eye on the ‘exit’ even when they’re being set up, and a merger or acquisition is one such exit route. Tech firms, just like those in any other industry, need to manage the process carefully.

Know what you are buying

M&As in the tech sector have all the standard issues and problems of integration, plus a few nuances that are particular to it. A company buying another’s capabilities needs to be confident that the economics work, and be clear about the financial investment needed to take the technology to the next level. This is often the most difficult part of an M&A.

The most recent high profile acquisition was Microsoft’s $7.5 million takeover of GitHub

“Frequently the technologies in question are cutting-edge and not yet fully tested for viability, requiring a robust understanding of how they actually stack up,” explains Markus Rimner, managing director and Europe M&A lead at Accenture Strategy. He adds that businesses should be asking fundamental questions like “is the functionality really cutting edge?” and “is the architecture scalable?”

For the acquiring company, there is a need for robust analysis of the technologies being bought, as most deals are shaped and become dependent on the current value, or the anticipated value, of the intellectual property (IP) being acquired.

“IP is the obvious area to confirm pre-close,” explains Diana Chiang, consultant at BTD Consulting. “Does the vendor own what they are selling? Do they depend on any critical third-party technology that is central to the future value?”

Daniel Domberger, media and technology partner at M&A advisory firm Livingstone, explains to IT Pro that for platform businesses, “IP ownership is the single most important thing – without it, there’s nothing of value.” He also urges that those considering an M&A check employment and contract clauses carefully, as they may include some unforeseen IP ownership elements.

Take care of the tribes

Loyal supporters aren’t just a feature of the tech sector – they are what every brand wants to build. But in tech, even subtle differences to a product can make a huge difference. Just look at how loyal people are to smartphone makers.

So making the right decisions about bringing two brands together is vital. Diana Chiang told us that both the buyer and the seller need to think about how a combined product would be branded in the future, and what effect this may have on the customer base.

“Firms with customer facing platforms should think about if they want to integrate or differentiate the brands pre-close and be ready to communicate to the market post-close.”

She adds that communicating with the markets, customers and employees is vital from day one, and to get that right there needs to be a clear integration plan and growth strategy. “people will stay engaged with a firm if they believe it’s going to take them in a direction they want to go,” explains Chiang.

Sometimes a merger of products may take far longer than the process of merging companies, explains Domberger. “You can rarely capture the hoped-for cost synergies arising from switching everyone to a single platform, because people don’t want to switch. You end up running the two in parallel for a lot longer than anticipated, in order to avoid alienating users.”

Businesses fail to integrate effectively

The integration of different technologies can be the greatest difficulty for tech sector post-M&A, something that may determine its ultimate success. It’s for this reason that those tech companies that have their sights set on being acquired should ensure that their technology is scalable and can be easily integrated into another system.

Given a lack of obvious connection between the firms, the Broadcom acquisition of CA Technologies in July made it one of the strangest deals of the year

However, tech companies generally have an advantage when it comes to integrating systems, policies and people, over other industries, explains Chiang. Tech firms are “usually better at being on point with the timing of integrating and/or transforming core technology as most firms have set a development cycle and practice to align and follow,” she explains.

It’s also important to consider people. Tech firms are often built on particular strengths or personalities within development teams, and so it’s vital that the key people are retained after any merger or acquisition has taken place. This not only ensures the success of the new venture, but it’s also an opportunity to reinvigorate a workforce.

“The real value in the software is in the people who know how it works, and who can continue to evolve it as the market develops,” explains Chiang.

Markus Rimner told us, “Accenture Strategy research shows that many companies are failing to extract the full value of these deals due to their inability to integrate diverse cultures – the ‘secret sauce’ powering acquisitions.

He points to recent research that showed 73% of UK companies had kept recent digital acquisitions as separate business entities. For Rimner, this reluctance to integrate businesses fully wastes the potential that these deals offer.

“Integration is key for companies to accelerate change,” he explains.

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