TechnologySoftware acquisitions: pros and cons

Software acquisitions: pros and cons

Private equity investors are often bad news for small softwares companies' customers, says Jeremy Roche. Not at all, a good partner can benefit everyone, argues Martin Leuw

Creating a monster

Choosing a financial management software system is one of the biggest
decisions a finance department can make. Prioritising the requirements that make
one system more suitable than another is vital, as well as verifying that your
supplier can deliver and support your system. But what happens if the company
that has won your trust gets acquired?

In recent years there has been a tremendous consolidation of financial and
analytic software vendors. Among the more notable was PeopleSoft’s acquisition
of JD Edwards, followed by Oracle’s acquisition of PeopleSoft.

Many customers chose PeopleSoft software based on the organisation’s approach
and style, as well as the product. Its customers now have to deal with a
supplier they may have rejected first time round.

And what of the JD Edwards customers? Oracle stated it did not want to own JD
Edwards, but did so through the PeopleSoft acquisition!

Many acquisitions are made for sound business reasons and enhance the future
of the software concerned. But others are made for financial reasons and often
threaten applications as new owners seek to maximise the amount they make from
your maintenance payments.

As a customer, you need to repeat some of the due diligence that you
undertook when you purchased your software to decide whether its future is

Look carefully at acquisition announcements and related communications.
Satisfy yourself that the logic behind the acquisition means your software has a

Clear reasoning and statements about the future of your software, including
benefits to staff and shareholders, are good. If it’s focused purely on the
financial transaction, but tells you as a customer it is good for you, then it’s
probably not.

Sources of capital for the acquisition are also good indicators. If the money
is loaned, then someone has to pay the interest, resulting in pressure to cut
costs and investment which could be limiting in the long term.

Positive acquisitions often include those where companies move into new
geographies, new market sectors, or add applications to their product portfolio.
As a customer, you may get access to additional products that are integrated
with yours, or you might get support in places you eventually expand to.

Negative impact on customers occurs when companies look for market share by
acquiring their competitors. More often than not, the combined company will seek
to reduce investment in R&D and product support and rationalise multiple
competing product sets. Not so bad if you use the product that becomes the lead
– not so great if your product is rationalised.

If in doubt as to whether your product is under threat, approach your
supplier and ask direct questions. The quality of their answers should give you
a good guideline. Read product roadmaps carefully to ensure that investment
continues in your product and you get a valid return on your maintenance money.

Make sure you are represented in any user group or community so you can share
your views with other customers.

If the product you are using is to become an ‘end of life’ software orphan,
you need to plan to change, however painful.

Jeremy Roche is CEO of CODA

Outrunning the competition

Until a few years ago, the UK software landscape was fragmented, comprising
of small private businesses and a few large publicly-quoted ones. None of this
was necessarily good news for customers.

The smaller companies had limited resources to continuously invest in new
product development and embrace the major changes being brought about by the
advances in technology. This left them exposed to the advances of the
predominately US majors, who have the resources and the technology, but little
understanding of customer needs in local markets.

The larger UK quoted software companies are often driven by the short-term
expectations of the City and pour their investment into sales and marketing.

Following our own management buyout at Iris, backed by Hg Capital in 2004,
the recent acquisition of Systems Union, financed by private equity investor
Golden Gate, is a sign that the UK market is maturing and will hopefully
encourage further investment in the sector.

Private equity is often accused of being short-term with an eye on an exit
within a three to four year timeframe. But to an organisation that aligns itself
with the ‘right’ investment house, the benefits to stakeholders, including
customers, can be significant. It can be like adding spikes to an athlete’s
running shoes. You can outrun the competition.

Finding the ‘right’ partner takes time. We carried out extensive
investigations into a number of possible private equity partners, looking at the
quality of the relationships they had forged with their existing investee
businesses and their focus on the end customer. Very early on, it was apparent
that Hg Capital, with its specialist technology team, access to resources and
strategic input, would help propel us forward.

We benefit considerably from the input of their team and their network of
contacts both in the UK and overseas, including opportunities to license
products from their other investee companies in our sector.

Working with a forward-looking partner brings many advantages. Technology is
a challenging business and it’s hard to always get it right.

At Iris, we do try harder and are looking to continuously improve and learn.
Private equity has opened our eyes to the possibilities outside our normal range
of vision.

Successful software companies will be those that capture and build on the
opportunities created through technological change and work in partnership with
their customers to deliver the business benefits they can provide in a mobile

Martin Leuw is group CEO of Iris Software

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