Jeff: Well, if you’re six, 12 months into it, things that I’m looking for… Now, let’s say you have a non-tech company that acquires a technology company or even a large tech company that acquires a small technology company. When you enter the software economy, there are many things that are different. One of them is talent, the way people think, the types of people you hire, the culture of these companies in the software economy. And the big sign is how many of the key people stay, and more importantly, what their roles are in the company.
So when you see companies being acquired and executives from the acquired companies starting to get promoted and take on more roles in the acquiring organization, that’s a big sign that the cultures are aligned. The things the acquired company brings to the table are valued by the acquirer, the cultures merge. The benefits, even if they take time because of the integration of products and technologies and channels and markets, can be long-lasting. But when you see talent coming together like that, I’d say that’s a good sign. Because software is an intangible IP and it is very much tied to the people who build and maintain it. If your talent is depleted due to culture, compensation, or other factors after an acquisition, that’s usually a leading indicator that the thesis is going up in smoke. So that was the first thing I looked for.
Now, in a private equity deal you don’t see that, because the company is the company. In some cases, the only thing that changes is the board of directors, especially if a company is well managed and a private equity firm wants to keep it that way, there may not be much change and things can continue as normal. . The only thing that has changed are the shareholders. But if it’s an operating company being acquired, talent is a good place to look for leading indicators.
Laurel: With more and more companies attracted to the technology scene as you describe, it seems like a crowded market. So how can a company differentiate itself to stay competitive and be discerning when seeking investments?
Jeff: Yes. That’s why I think it’s right to take theses. Becoming a holding company and buying something is probably not the best approach, although there are holding company models out there. The duplication of strategy and M&A, some people may call it the M&A thesis or the integration thesis. So let’s take some examples. Vertical integration: When you integrate vertically or acquire a supplier, there can be significant synergy, there can be significant differentiation. And if you take the time to put that strategy in place, find the right companies to acquire that fit the thesis, and make sure you fund the merger. Integration isn’t just a bunch of rows in spreadsheets, but it’s really getting down to earth, in the weeds, knowing the operating models, the people, the business processes, the tools that are needed. to successfully integrate to see your thesis. It can be different and that can be game changers for companies in the market and in the P&L.
Laurel: And you mentioned it earlier, which is the unknown risk, high reward aspect of acquiring technology companies, but new capabilities and talent is something that can offer a new company. So what are the most common obstacles companies have faced in the past?
Jeff: I touched on it before, it may be a little redundant, but I would say that the first is when you come to the software economy, it is new to you. Companies can easily go from zero to 100, but they can go from 100 to zero. The landscape is littered with high-flyer companies, leaders in their space, that are now defunct and out of business. Basically got the fire sale and someone has run out of maintaining the long tail of some of these companies. So you see that in old-school desktop publishing, you see that in old-school CRM and ERP, you see that in different vertical applications that serve vertical businesses. All sectors have once-dominant players who have not changed, perhaps lost their key talent, perhaps have an inverted balance sheet, are over-leveraged, and are basically gone and gone off the map. as quickly as they come.
Again, you can go from not being a company to being a high-flyer leader in five, six, seven years and just as quickly, possibly faster, go to zero. That’s why it’s so important that the people who get these companies invest in them, understand that risk, and know that sometimes more things need to be done to keep these companies growing and flying, even though you that they have reached their peak.