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Jeff: Well, if you’re six, 12 months, the things that I’m looking for… Now, let’s say you have a big tech company that’s buying a tech company that’s not a tech company, or even a small tech company. When you enter the software economy, there are many different things. One of them is talent, the mindset of people, the types of people you hire, the culture of these software economy companies. And the biggest sign is how many key people stay around and, more importantly, what roles they have in the company.
So when companies see what they’ve acquired and executives from the acquired companies start to get to know each other and play a bigger role in the acquiring company, that’s a sign that the cultures are aligning at a high level. The things the acquired company brings to the table are valued by the buyer, the cultures merge. The benefits, though taking longer due to the integration of products and technology and channels and markets, may take a little longer. But if you see the talent coming together that way, I’d say that’s a very good sign. Because the software is intangible IP and is very much tied to the people who build and maintain it. If you have talent drains after acquisition due to culture, compensation, or other factors, this is usually a good indicator that the script is going up in smoke. So that’s the first thing I look for.
Now, you don’t see that in a private equity deal, because the company is very much a company. In some cases, the only thing that changes is the board of directors, especially if a company has been well run and the private equity firm wants to continue that way, there may not be much change and things can continue as usual. . The only thing that changes are the shareholders. But when an operating company is located, talent is a good place to look for lead applicants.
Laurel: As you mentioned, it seems like a crowded market with an increasing number of companies interested in the technology aspect. So how does a company differentiate itself to stay competitive and be prudent when looking for investments?
Jeff: Yes. So I think he got those issues right. Being a holding company and buying something is probably not the best approach, although there are company models out there. By doubling down on strategy and M&A, some people might call it the M&A thesis or the integration thesis. So let’s take examples. Vertical Integration: If you want to vertically integrate or acquire a supplier, this can be a significant integration, it can be a significant difference. And if you take the time to develop that strategy, find the right companies to find the right fit for the thesis and make sure you fund the merger. Integration isn’t just a bunch of rows on spreadsheets, it’s really getting down to earth, in the weeds, knowing the business models, people, workflows, and tools needed to successfully integrate to see your thesis. Those can be differentiators and those can be game changers for companies in the marketplace and on the P&L.
Laurel: And you mentioned this earlier, which is the unknown-risk, the high reward of acquiring technology companies, but the new skills and talents are what a new company can offer. So what are the most common obstacles companies face then?
Jeff: I’ve touched on this before, it bears repeating, but the first thing I’ll say is you’re getting into the software economy, it’s new to you. Companies can go from zero to 100 pretty quickly, but they can go from 100 to zero. The landscape is littered with high-flying companies, incumbents, now-defunct and out-of-business companies. They were basically acquired through fire sales and someone is running out of the long tail of maintenance on these companies. So you’ve seen it in old-school desktop publishing, old-school CRM and ERP in different vertical applications serving vertical businesses. All of these sectors have had players who once did not dominate, perhaps lost their key talent, perhaps had an inverted balance, were overused and basically disappeared off the map as quickly as they did.
Again, you can go from not being a company to being a top flight leader in five, six, seven years and just as quickly, probably faster, to zero. So it’s important that people who acquire these companies invest in them, understand the risk, and realize that sometimes hard things have to be done to keep these companies growing and flying even after they think they’ve reached the top.
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