Jeff: Well, if you’re six, 12 months into it, things that I look for… Now, let’s say you’ve got a non-tech company acquiring a tech company or even a large tech company acquiring a small tech company. When you enter the software economy, there are a lot of things that are different. One of them is talent, the way people think, the types of people that you hire, the culture of these software economy companies. And the great sign is how many of the key people are staying around, and more importantly, what their roles are in the company.
So when you see companies acquired and the executives from the acquired companies start getting promoted and taking on larger roles in the acquiring organization, that’s hugely a sign that the cultures are aligning. The things that the acquired company brings to the table are valued by the acquirer, the cultures are integrating. The benefits, even if they take longer because of the integration of products and technology and channels and markets, might take a little longer. But if you see the talent integrating in that way, I’d say that’s a pretty good sign. Because software is an intangible IP and it’s very much tied to the people who build it and maintain it. If you have talent drains due to culture, compensation, or other things after an acquisition, that’s usually the leading indicator that the thesis is going to go up in smoke. So that’s the first thing I look for.
Now, in a private equity deal you don’t quite see that, because the company is pretty much the company. In some cases, the only thing that changes is the board of directors, especially if a company was well run and a private equity firm wants to keep it that way, there may not be a lot of change and things may just go on as normal . The only thing that changes is the shareholders. But when it’s an operating company being acquired, talent is a good place to look for leading indicators.
Laurel: With a growing number of companies attracted to the technology landscape as you described, it seems like a crowded market. So how can a company differentiate itself to stay competitive and be discerning when looking for investments?
Jeff: Yeah. So I think getting those theses right. Just being a holding company and buying something is probably not the best approach, although there are holding company models out there. Doubling down on the strategy and the M&A, some people might call it an M&A thesis or the integration thesis. So let’s take examples. Vertical integration: If you’re going to vertically integrate or acquire a supplier, that could have significant synergy, could have significant differentiation. And if you take the time to put that strategy out, find the right companies to acquire that fit the thesis, and make sure you fund the integration. Integration is not just a bunch of rows on spreadsheets, but it’s actually getting on the ground, in the weeds, figuring out the operating models, people, the business processes, the tools that are needed to successfully integrate to see your thesis through. Those can be differentiating and those can be game changers for companies both in the marketplace and on the P&L.
Laurel: And you mentioned this earlier, which is the unknown-risk, high-reward aspect of acquiring technology companies, but the new capabilities and talents is something that a new company can offer. So what are the most common obstacles that companies face then?
Jeff: I touched on this before, it’ll be a little redundant, but I would say the first is you’re coming into the software economy, it’s new to you. Companies can go from zero to 100 pretty quickly, but they can go from 100 to zero. The landscape is littered with companies that were high-flyers, leaders in their space, that are now gone and out of business. We were basically acquired in fire sales and somebody’s running out of the maintenance long tail on some of these companies. So you’ve seen that in old-school desktop publishing, you’ve seen that in old-school CRM and ERP, you’ve seen that in various vertical applications serving vertical businesses. All those sectors have had once-dominant players that didn’t innovate, maybe lost their key talent, maybe had an upside-down balance sheet, were over-leveraged, and basically disappeared and went off the map as quickly as they came on.
Again, you can go from not being a company to being the high-flyer leader in the space of five, six, seven years and just as quickly, possibly more quickly, go to zero. So it’s really important that folks acquiring these companies are investing in them, understand that risk, and realize that sometimes drastic things have to be done to keep these companies growing and high-flying, even after you think they’ve reached their apex.