Mergers & Acquisitions: Sources of external innovation
The acquisition target provides its products either via an asset deal or a share deal.
The software vendor pays a purchase price in the form of e.g. cash, shares or other compensation.
DefinitionsHere is a short overview of definitions of terms used in talking about mergers and acquisitions. Merger means that two companies come together under one ownership. Acquisition means that one company is being bought by the other company. Divestment means that one company is selling assets. The terms are shown in the following figure. The blue bubbles are companies.
Mergers & acquisitions video lessons
Here are video lessons about merger and acquisition basics.CLICK HERE FOR MERGERS AND ACQUISITIONS BASICS COURSE
GoalsNow let us look at examples of goals that are driving the acquisition of software companies. Often we find a growth strategy of a company as one of the main reasons driving an acquisition. Besides that, an acquisition provides the chance to achieve a number of different goals, of which important examples are listed in the following figure.
The detailed analysis of a potential acquisition is called Due Diligence. It contains the analysis of all aspects of the to be acquired company. The due diligence consists of a consideration of all products, services and payments of the software vendor, its ecosystem of customers, suppliers and partners as well as accounting and controlling. In addition, a cultural due diligence identifies potential issues of cultural integration.
Based on the detail analysis of the status quo, a projection and plan for the future of the target business and organization is created.
Find more information on this page: MergerDueDiligence.com
Results of the due diligence is a valuation of the target company, a list of all results of the analysis described above and a list of chances and risks in doing the deal including mitigations for the risks and critical success factors.
What makes the software industry special?
The following table shows the distinctiveness of the software industry regarding due diligence in contrast to other industries:
Type of DD
Distinctiveness of the software industry
Strategic due diligence
High volatility in time, high impact of platform strategies and partner ecosystems on success
Market due diligence
High market size volatility in time
High frequency and speed of disruptions in markets
Commercial due diligence
High change rate and diversity of business models, revenue models and their combinations
Technological due diligence
Distinctiveness and high change rate of software platforms and other technology
Human resources due diligence
High importance of workforce quality due to low automation in production
Cultural due diligence
Software industry raises high employee expectations in culture
Intellectual property due diligence
Increased importance due to strong role of IP
Financial and tax due diligence
Diversity of business, revenue and delivery models raise challenges
More information on the Due diligence page.
ChancesThere are a number of potential advantages in acquiring a software vendor. They range from extension of the product portfolio to consolidation of markets.
RisksNevertheless, there are risks in mergers and acquisitions. Some are independent of the industry you are in, some are very specific to the software industry. It is one of the main tasks of due diligence of an acquisition to identify issues and risks and provide proper evaluation and mitigation of issues and risks.
Find more details at MergerDueDiligence.com
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(C) copyright Dr. Karl Popp 2017