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M&A in the channel: what’s the partner playbook?
- 17 January, 2020 11:12
Nigel Parsons (IDC)
In assessing the channel landscape - locally, regionally and globally - partners are gearing up for another year of frenzied mergers and acquisitions (M&A) activity.
Motivated by different agendas, technology providers are assessing buying, selling and merging options with more industry consolidation expected during the next 12 months.
As an industry analyst, I’ve witnessed many successful and not-so-successful integrations following M&A activity.
In one case, I was of the opinion that the company in question made acquisitions for the sole purpose of killing off those businesses as competition. In that regard, they succeeded spectacularly.
Drawing on 30 years of technology experience in Asia Pacific, I’ve seen first-hand how channel partners have been able to successfully diversify and grow business operations through acquisitions.
Here’s some key points for channel partners to consider when exploring M&A activity.
It’s not always the case that partners are seeking to make acquisitions. Many regularly desire company valuations, especially if privately-owned, as it’s a great yardstick to measure the health of a business. That said, there are multiple reasons for partners to consider acquisitions but it must fall into a long-term strategy.
Development of a particular business area can either be organically grown or acquired. Most partners typically prefer organic growth but there are many reasons for acquisitions that fit into the overall business objectives.
Let's assume that a partner has a solid business plan, concrete objectives and a strong idea of the type of company they want to acquire, then sourcing receptive targets is next.
Perhaps make it known within your own team that you are exploring complementary targets? Employees could hold insightful information about other companies they have worked with or for in the past. This could also help build confidence in the business while creating an inclusive culture.
Another place to seek out targets is at events. For example, those seeking to buy security capabilities could attend local and regional cyber conferences to help draw up an initial target list.
Likewise, Google searching can help as a starting point with many subscription services available to help flesh out basic company information to make first level determinations.
Or, you could pursue an out-of-the-box option.
Examples are common of management not actively considering acquisition as a strategy until it has been recommended by a third-party, such as a financial advisors.
Outside influencers can provide an unbiased view with regards to M&A and could possess a solid picture of the health of both businesses. In these scenarios, most of the preliminary, matching suitability work is already done.
Whatever the method, let’s assume you have drawn up a shortlist of potential targets. Now, bite the bullet and make an initial, professional business approach. This must be a two-way street in which benefits to the other party are also outlined.
Why would they consider a buyout? What’s the benefits? How do the strategies of both companies converge to make this a feasible reality?
Even a privately-owned company will treat existing employees like family and will want to ensure post acquisition that they are going to be as well looked after as they currently are. And let’s not forget the obvious financial and legal specifics with many experts available who perform auditing, valuation and contractual services.
Ensure that the financial specialists properly understand valuation metrics for cloud-based companies with strong annuity revenue streams such as net monthly recurring revenue, annual run rates, churn, cost of customer acquisition and so on.
These are not always traditional fiscal metrics and can be interpreted with wide variations particularly if a private entrepreneur is concerned.
The bean counters and lawyers are great at talking to each other once they’ve been properly instructed. Suffice to say that as the acquisition progresses through to the legal and contractual side, you are well advised to hold back sufficient contingency payments based upon successful integration.
There are always going to be some things that come out of the woodwork. I recall one acquired company that had an undisclosed analyst contract for $200,000 per year for the next three years. This cost had to be retrospectively included into the deal and came out of the final series of settlements two years following.
It wasn't a deliberate non-disclosure, rather something that had slipped through the cracks at the time. Everybody involved learned a valuable lesson.
One organisation that I worked for had very firm metrics assigned to the integration of acquisitions - one of which was staff. They assumed that of the staff who came over with the acquired company, only around 30 per cent would still be with them after two years.
Upon first seeing this, I was a little shocked. I believed this was a very dispassionate and de-humanising, numbers-only approach. Two years later however, the result was 72 per cent of the staff had cashed in their stock and handed in their notice. We weren't caught flat footed because we had built it into the plan.
Recognising the reality that people management will be a big issue and that it will be impossible to make everyone happy throughout the integration will save a lot of headache and frustration.
People will leave due to company-cultural differences and other reasons; there is very little you can do about it except to wish them well.
Location, location, location. Is this an important consideration during the integration process?
Many entrepreneurial companies have their head offices located conveniently for the founder - it is a natural choice made by the decision-maker. Employees hired following that typically also have a short commute or possibly a home office arrangement.
Within the same city, integration of companies is not usually a problem, but when the city locations are different this can be challenging. Unless there is a solid reason for not integrating offices, I strongly recommend this be undertaken without delay.
Critical staff need to be relocated with suitable packages to account for disruption. Keeping disparate office locations far removed from the mainstream business in my experience leads to a slow, tragic death of that expertise.
I've seen a poorly managed integration keep an office on the other side of a country with only four employees who managed to hold the rest of the organisation to unreasonable ransom due to their level of expertise. It didn't end well and could have been avoided with clear communication and management at the start.
Acquisitions are a good growth strategy but they don't suit every business. When properly managed and integrated however, the results can exceed initial expectations.
Nigel Parsons is a research director at IDC