Acquisition decisions usually come out of the corporate strategy groups and I would really like to go through one such recommendation report someday to get more insight into the kind of analysis that goes into such a decision. I haven't been to a business school but I would like to list down 'Which One' and 'Which Not' to acquire based on my very limited knowledge of the software industry.
"Which One"
- Complement your offering - A software product company may acquire another smaller one that fills in functional gaps & holes. However the target company should be mature in what it offers (avoid a start-up unless you want access to IP), the revenue/operating margins etc. should be solid (avoid loss making companies) and if possible it should be operating on a compatible technology (integration can be a mess otherwise).
- Acquire Customer base - One may acquire a company just for the customer base. This can either be for gaining entry into a specific segment (say SMBs) or just to simply expand your existing customer base. You, however, may have a functionality overlap and it will help if the target company is not doing too well financially as it will be easier for you to convince acquired customers to upgrade(?) to your offering.
- Kill Noise - It may be worthwhile to buy small niche companies just to kill noise. This should be done only if the small company is struggling financially (revenue going down, trading at 52-week low, etc.). The noise that you want to kill may be in the form of repeated elongated sales cycles in that niche domain because of competition from this small company or negative campaign during sales cycles or an open IP infringement lawsuit from this smaller company or some such headache. Of course, this will make sense if you are a big multi-billion dollar company and the noise creating company is worth a few hundred million.
- Horizontal Expansion - An acquisition may also make sense if you are very profitable but spot a glass ceiling in the vertical(s) you are operating in. In order to ensure further growth in revenues/profits, you may want to use some of your idle cash productively by entering a new industry via an acquisition. Of course, the target company in this case should preferably be a mature and profitable one in the business it operates in. This buy vs make decision will be even better if your current products/services can also be sold to the customers in the new industry or vice versa.
- Eat into supply chain - Acquiring your upstream/downstream partner in the supply chain may sometimes make a lot of sense and you may be able to improve the operational efficiency and thus become more competitive.
- Access to IP - An acquisition may be made to gain access to IP/patents and build something promising and profitable on top of that. This will be better than wasting an opportunity or even paying royalty/settling lawsuits later on. It will be easier to do this if the IP lies with a very small company compared to you.
- Kill Competition - You may acquire a competitor to gain market share, increase your revenue/profits and strengthen your leadership position. However, this may be successful mainly in high growth or emerging industry. Acquiring a competitor, especially a medium/large one, in a mature industry can be a mess.
"Which Not"
- Technology Mismatch - Acquiring a company with an intention to complement/extend your current offering can be very dangerous if it operates on a different technology. It is likely to result in huge integration challenges and more often than not you will end up in a mess.
- Immature Products - Acquiring a company with flashy but immature niche products with limited or uncertain revenue stream is a gamble that one should avoid in my opinion, unless you have ton loads of cash that you don't care about. Buying a company based on promise is alright as long as there are at least a few customer success stories to its name.
- Buy Vs Make - Buying a small niche company, when it is not tough to produce that software or diversify your service offering into that vertical in-house, is not a smart move in my opinion. Acquisitions always come with redundancies, cultural differences & geographical challenges. Moreover, whatever you build in-house will always better integrate into your overall portfolio and brand.
- Revenue Gain - Buying a company operating in a related vertical just to beef up your revenue is a short term gain in my opinion and can cause damage in the long run. One should evaluate how easily the target company would integrate into your offering/brand in the medium to long term before going ahead.
- Expensive Acquisition - Acquiring a company by paying much more than its current market value is something that should be avoided. Sometimes, companies get sold out for much more than what they are worth either because there is more than one potential buyer in the game or because analysts claim a huge growth potential in that domain. An expensive acquisition should be done only if you are ultra sure about recovering your investment in some form.
- Kill Leading Competition - In a product oriented industry, acquiring a competitor to gain market share can be dangerous. This should be avoided especially if you need to pay a lot for this acquisition. Acquiring a medium to large sized competitor will either confuse your customers if you continue both offerings in parallel or will confuse you while trying to integrate or rationalize the offerings. Either way, it will be a big mess.
