Monday, January 16, 2012

Why Acquire Companies?

I’ve wanted to write this post for a while, but I was worried that you would read too much into it if it was published shortly after any particular acquisition by my employer, OpenText. Obviously, we know a thing or two about acquisitions at OpenText. They are an important part of our growth strategy. But this post is not about any particular acquisition or about OpenText per se, it is about the general reasons why companies buy other companies.

High-tech acquisitions tend to draw a lot of attention when they are announced and most of the coverage is focused on the perceived strategic fit. Or, what the technology pundits consider to be the strategic fit. Unfortunately, most of the time, everybody focuses on the technology and nothing else. Sure, the technical strategy is pretty fundamental for a technology company. Yet in reality, there are many possible reasons for high-tech companies to acquire:

1. Technology
This is what most people think of first and a technology driven acquisition is usually driven by vendor’s “build, buy, or partner” analysis - one of these strategies is the most economical given the cost, time to market, and account control.

2. Access to new markets
An acquisition can give the suitor quick access to new markets for the purposes of growth or diversification - for example to new geographies, new channels, new partners, new vertical markets, or access to exclusive government contracts. Buying a vendor who’s established itself in a given market can be an effective way to get there fast or cost-effectively.

3. Customer base
Buying a customer base can be extremely lucrative in the enterprise software market. Customers typically pay around 20% of the original license cost annually for maintenance - for support and upgrades. Given how sticky enterprise software can be, this is often a highly profitable business for many years to come.

4. Talent
You want to off-shore your development or quickly build a sales force specialized in a new vertical market? Buying a company with that kind of talent may be a quick way of getting there. Just make sure you keep them.

5. Assets
Acquiring a company can be an effective way to get their assets, i.e. a patent portfolio, production facilities or data centers.

6. Outflank competition
Sometimes, buying a company makes sure a competitor doesn’t get it. The company may have been a supplier, strategic partner, or a channel partner to your competitor and acquiring it may be a great way to disrupt the competitive balance of power.

7. Financial engineering
Sometimes, an acquisition makes sense for mostly financial reasons, such as tax loss carry-forwards, profits repatriation, or as a financial investment for the company’s venture arm.

As you can see, there can be many reasons for M&A activities (mergers and acquisitions) - and you might even come up with a couple more. So, the next time you hear about an acquisition, don’t just analyse the technology stacks before passing your judgment on the strategic fit.

Now, let’s get the 2012 M&A season started!

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