It’s the dream of many founders and entrepreneurs in the retail technology segment to build a great company, create a lot of value in that company, and then to ultimately sell the company to one of the “big boys” for a ton of money. I will use the “big boys” term generically to apply to the numerous acquisitive companies that are busy consolidating various solution providers in the retail technology space.
These big boys (intentionally not named here) are battling each other for retailer wallet share, acquiring interesting retail technology providers to expand their market share, acquiring new named customers, and growing their own product’s functional capabilities to be more of a one-stop shop for retail customers. This is the most efficient way for these companies to grow revenues, bring new innovation to market and provide increased value to their shareholders and customers.
Over the past decade and more, there have been a proliferation of startups and niche focused companies solving specific problems for retailers. The common characteristics of these companies is that they provide specific value to their customers and they concentrate their research and development activities to a very narrow set of problems. Their sales and marketing is focused so they can more effectively monetize their solutions in discrete solution areas which makes them attractive to potential acquirers.
This cycle-of-life for startups and other niche software companies, selling to larger players, has been around for many decades and it is not likely to subside anytime soon. Despite the frequency of larger companies buying smaller ones, why is it that so many of the big boys do such a poor job in effectively integrating their acquisitions? Shouldn’t practice make perfect? While there are some examples of great acquirers in the market, it is far more common to see some acquisitions result in a slow painful decline of the acquired company’s value when it becomes a part of the larger entity.
When an acquisition is first announced, there is a lot of enthusiasm. Leaders from both the acquiring company and the acquired company tout the many reasons why the combination makes so much sense for customers, shareholders and employees. This messaging can be very reassuring to those impacted by the acquisition. Retailers hope that the acquirer will retain the expertise from the acquired company, and ultimately invest more money in its products. Employees of the acquired entity hope that what made their place of employment so special, won’t change. Perhaps they can even look forward to more career opportunities? Meanwhile, shareholders are happy to achieve a positive return on their investment.
Unfortunately, not long after the acquisition enters its honeymoon phase, management and employees from the acquired entity start to notice that working within a larger corporation may be a bit harder than originally expected. Decisions tend to be slower and they involve many more people. There may be conflicting priorities with other solution areas and products within the new company. And culturally, sometimes things can seem more corporate versus entrepreneurial. Slowly, with the pace increasing over time, key talent from the acquired company starts to leave to pursue other things. As that talent departs, business results start to suffer, and buyer’s remorse on the part of the acquirer starts to set in.
The most common symptoms of a challenging integration will occur in customer facing areas ranging from marketing, product management, sales execution, implementation and support. Behind the scenes, there can be other challenges not quite as visible to the outside eye. For example, larger companies tend to manage and control development expenses based on their broader priorities. This can sometimes lead to an uneven application of R&D capital or focus. When the acquired entity was independent, it didn’t need to compete for focus or capital or R&D, but under the umbrella of a larger corporation it will need to. Any of these elements can potentially initiate the start of a bad outcome.
How often do we see an up and coming software company get acquired by a larger entity only for this cycle of death to ultimately occur, even if it is a slow death? Neither the acquirer or the acquired want to see a bad outcome for the business. No one wants their employees or their customers caught up in a deal that regrettably goes bad over time. Nevertheless, this cycle repeats itself all too often.
It doesn’t need to be this way. Usually the thesis behind a given acquisition is rock solid. So, if the idea of one company buying another is good, how do things end up going bad? Bad outcomes are often tied to poor post-merger integration (PMI) activities. It is incredibly rare for a large company to buy another company with the expressed intention of killing it. Instead, the reality is that many PMIs are too superficial and they lack adequate planning that anticipate these unwelcome outcomes. Frankly, sometimes too little time is invested up front in answering the really tough questions:
- What will we do if key talent leaves unexpectedly?
- How can we get the new employees enthusiastic about their new company and its mission versus merely being reminiscent of the previous company’s mission and culture?
- Have we developed and communicated a plan that sets expectations about what to expect around any potential change likely to impact key stakeholders?
- Have we included enough stakeholders from the acquired business in our PMI planning so we avoid glossing over important planning considerations?
- How will we deal with cultural impacts due to employees moving from an entrepreneurial culture to a more established corporate big company culture?
- Do we have an effective scorecard to measure and monitor the results of our integration over time compared to the original goals of the combination?
While there are risks for any potential acquisition, some actually do work out very well. What does a good a combination look like? Below, I am sharing five key things that tend to demonstrate that an acquisition is going well for both the acquirer and the acquired:
- The new combined company is successful at retaining key talent from the acquisition over a sustained period of time. This includes key management, engineering, sales, services and support talent. If key talent is leaving, this is truly an ominous sign for the future.
- The new combined company can grow their post-acquisition revenue from the pre-acquisition baseline levels on a sustained or better an accelerated basis. If the business isn’t continuing to grow as a part of a larger entity, this can spell doom. Cost cutting almost always will follow revenue declines.
- The new combined company can bring more value to the table for clients by integrating pre-acquisition product capabilities into a more robust post-acquisition product solution. One-plus-one should equal three (1 + 1 = 3). There should be product offering synergies that can benefit existing customers beyond initial expectations. If there isn’t strong cross selling of legacy company solutions in concert with the newly acquired solutions, then the combination is probably not producing enough business results for the acquirer.
- If the combined company has a product roadmap that invests in the acquired solutions in a robust way, this is generally a positive sign for the future. Conversely, retailers should be cognizant of reductions in investment levels or the orphaning (example – end of life) of existing solutions. One of the benefits that customers should want to see as a part of being a larger company is to obtain access to greater resources such as R&D capital, etc., certainly not less.
- If the combination results in a better go-to-market approach, i.e. a larger sales force is now selling a broader, more compelling solution, or more marketing is being targeted on the new offering, that is obviously a positive sign. If things continue to need to be operated in silos even after the combination, then it is probably not yielding the expected synergies.
In the retail technology space, there are a few notable companies who have perfected the art of making great acquisitions and having those acquired survive and thrive, but this is generally the exception versus the rule. More commonly, the big boys fail to successfully integrate acquisitions into their companies. It starts very simply with the loss of a key person or two, then an erosion of talent can expand more quickly, unintentionally suffocating the company/solution that the acquirer bought to grow their business in the first place.
We see this phenomenon repeatedly. Perhaps it’s the natural cycle of life for a small or medium sized software company? A bit more due diligence and planning on the front side by the active acquirers and their target acquisitions might help to prevent the unwanted death of a great solution. Admittedly, over my career, I have been on both sides of this process and have learned a lot, sometimes too late, from those experiences.
About the author:
Todd P. Michaud is the President & CEO of Transformational Retail Technologies, Inc., a company that advises growth-oriented technology companies in the retail segment. Prior to this role, Michaud was Global VP & GM of NCR’s Global Enterprise, Merchandising & Supply Chain (GEMS) business unit. He joined NCR Corporation because of its 2013 acquisition of Retalix Limited, a global retail software company where he was the President of the Americas. Before Retalix, Michaud was President & CEO of Revionics, a SaaS-based, provider of big data-based predictive analytics for retailers. Michaud was also the President & CMO of IDS, LLC, a successful enterprise and supply chain software company focused on the food industry, acquired by Retalix in 2005. Michaud started his career with 16 formative years at the IBM Corporation.