Buying a technology business offers a huge amount of potential to turbo-charge your profits, but this particular type of acquisition is also fraught with complications, largely due to the disruptive power of a technology company. Taking things back to basics and keeping an eye on these essential steps when buying a technology business will help to guide purchasers towards success.
1. Identify a Target
This is about more than just spotting a target and chasing it blindly. Successful technology business buyers are rational and realise that while a lot of businesses ‘could’ be bought for their technology, only a handful will really fit in with their requirements.
In the case of buying a business for its technology, the right acquisition won’t be identified by focusing primarily on basic statistics such as turnover and profit. Instead buyers need to assess the technology itself and its inherent potential and flexibility when it comes to implementations. True value here comes from being precise and selective, while looking beyond basic information.
It’s also ill advised to waste time pursuing a target that is outside of the buyer’s budget from the start. It is all very well to make a cheeky offer but buyers need to have a clear understanding of their own finances and the vendor’s expectations way before the negotiating stage.
This is not to say that thinking smart can’t extend budget constraints. The distressed market is an excellent resource for potentially below-market price deals, although it will require additional research and close monitoring to find the best buys.
2. Factor in Time to Profit
In answer to what makes a successful acquisition, a clear acquisition strategy comes up time and time again.
When buying a business for its technology, this strategy needs to have a strong focus on the time (and money) it will take to turn the acquisition into a profit-generating asset.
The purchase itself might not offer any value upon initial acquisition; in fact it is quite likely to be a drain on resources during the integration process.
A successful strategy, however, will keep the team in terms of both time and money and make it clear as to when the purchasing business can expect to see a return on investment.
The strategy needs to look at questions such as: When will the technology be fully adapted or integrated? When will the technology start to show a profit? How will this profit be measured? What investments are required to get it to that point?
Asking and answering these questions and putting a plan of action with clear goals and deadlines before negotiations even begin, will save time and money.
3. Maintain Clarity
When buying a business in order to capitalise on its technology, there is a very real chance that resources and assets could be stripped in the turnaround or integration process. When staff are included in this process, the potential for badwill is enormous.
Maintaining clarity is the most important step in keeping rumours and potential negativity at bay. Letting people go is an inevitable part of buying and starting to run a business, but the most successful entrepreneurs are those who manage to deal with difficult situations like these in a respectful manner.
Non-technology buyers increased value in the global technology mergers & acquisitions industry in the first quarter of 2015 (EY First Look report) in a trend identified by the accountancy firm as ‘blur’.
Jeff Liu, EY’s global technology industry leader for transaction advisory services, elaborated: “The ‘blur’ between tech and non-tech that we see in 1Q15’s record-setting technology M&A will accelerate.
“The internet of things shows why: it drives the integration of digital sensors, processing, connectivity and security into virtually every industry’s products. And that pushes tech companies to deliver more comprehensive solutions - increasing blur and spurring more M&A.”
Even within the technology sector, companies who are buying up firms in other sectors face challenges when it comes to integrating the new technology. But for the businesses with a strategy in place, these challenges are bringing with them new opportunities.
When hardware giant Dell purchased Quest, for example, it gained a great deal of scale through a new set of software offerings. Because Dell put a lot of thought into how to integrate the acquisition it noticed that it would be more suitable to establish a software operating division to give the new entity the autonomy it needed to be successful - rather than folding it wholesale into the existing giant.
Among the questions asked by Dell and other successful technology businesses are:
Is the technology opening up the main business to a new demographic?
What is the best way to reach that demographic?
Are new sales and marketing strategies required?
Will the company’s core product be affected or can the two strategies fun concurrently?
5. The Measurement of Success
As mentioned earlier, a strong strategy needs targets in place to measure the ROI of an acquisition. Without this it’s almost impossible to judge if the purchase was a success in the first place and what actions need to be taken to put things on track for future growth.
The indicators of success will depend on the individual companies concerned but they are particularly complicated when it comes to technology acquisitions due to the sheer number of variables involved and the speed with which the market moves.
“High multiples can generate risks for tech companies engaging in M&A. In their desire to supplement internal R&D efforts and speed new offerings to market, some buyers overpay, a practice that comes back to haunt them three to four years later when analysts look at underperforming acquisitions and ask: “You paid a huge premium for this company two years ago; where’s the ROI?” Some organisations can answer the question effectively; others can’t.”
Deloitte Top Ten Issues for Technology M&A in 2014
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