Behind a software acquisition — Quality perspective
The purpose of this article is to briefly introduce how software acquisition deals are driven from a process perspective. Additionally, Deep dives specifically on the impact of software quality in the mergers and acquisitions decision-making process.
State of Software Acquisitions
In 2023, mergers and acquisitions (M&A) in the technology sector hit a multi-year low. Both the total deal value and median valuation were affected. According to 451 Research, spending on tech M&A last year was less than $300 billion, indicating the lowest level of spending in a decade. However, the outlook for 2024 is more positive.
- Despite a slowdown, we have witnessed significant mergers and acquisitions in the technology sector, where large corporations acquire promising tech companies.
- Below are some notable mergers and acquisitions in the tech industry, involving big players taking bold bets.
IBM acquires SoftwareAG enterprise tech business ($2.33 Billion) & Apptio ($10.6 Billion), Databricks Acquires MosaicML ($1.3 Billion), Cisco to acquire Splunk ($28 Billion), New Relic Goes Private ($6.5 Billion), & OpenText acquires Micro Focus ($5.8 Billion), Broadcom Completes Vmware ($61 Billion), HPE acquires Juniper ($14 Billion) & Synopsys acquires Ansys ($35 Billion).
- In my opinion, Industry giants are paving the way for the next major trend (AI, Cyber Security, Hybrid cloud…) with proactive deals, each representing a bold bet for dominance. More such business amalgamations will likely be witnessed in the year 2024.
- While market dominance and access to specific technologies are the driving factors for companies to make these big decisions, yet, it is important to recognize that the ultimate commodity being acquired is software technology.
What “process” guides buyers to make M&A decisions, and What “key factors” and “data” fuels large companies to pursue billion-dollar acquisitions?
Due Diligence — “The Process”
In simple terms, Due diligence involves collecting and analyzing information to avoid legal liability.
- Before any merger or acquisition, it’s essential to review and audit the business. The goal of M&A due diligence is to inform investment decisions and maximize value in the transaction.
- There are typically five primary types of due diligence when it comes to mergers and acquisitions.
- Each of these names is self-explanatory and has its purpose for reviewing and auditing the respective process areas.
Let’s deep dive into Technology due diligence which is the focus area of this article.
Introduction to “Technology Due Diligence” (TDD)
Technology due diligence (TDD) is a thorough in-depth analysis of the state of a company from a technical perspective, including its products, process, staff, infrastructure, architecture, roadmap, and services.
- A part of this process is called “Software due diligence” an analysis and evaluation of the code base and the software engineering with a focus on potential risks.
- In an M&A transaction, professionally conducted software due diligence reveals the opportunities and risks for successful further development and integration of the software at an early stage.
- For an investor to make a fact-based investment decision, the software-centric requirements need to be clarified sufficiently.
- Typically, buyers hire third-party firms to conduct technology (software) due diligence. Many companies offer technology due diligence services such as Bain & Company, Synopsys, CAST, Moravio, etc.
Technology (Software) due diligence requirements
- The table outlines a general idea of the due diligence requirements and these are not comprehensive and can be customized by the buyer based on needs.
- Checklists and summary reports are customized as needed for the buyer’s organization.
- The outcome of technology due diligence is a detailed report, as objective as possible, compiled by the reviewer based on reviews and assessments performed. The report outlines the risks, pros and cons, and prospects.
- Due diligence can uncover issues that may require technical remediation, and the seller may agree to fix them before or after the close. Buyers can also use the definitive agreement to allocate risk appropriately.
- Technology due diligence checklists and sample reports are available publicly. Sample reference for due diligence Checklist & Report
Don’t miss the impact of AI on technology due diligence! As it transforms the mergers and acquisitions (M&A) landscape. Read here
Technology due diligence — Established Org vs Startup Org
- Large and established organizations often have well-defined processes and systems in place to ensure compliance with various regulations and standards. Though efficacy may have gaps, a quality management system is in place.
- Startup Organizations: The challenge is more prominent for startup organizations. Most startups are built through trial and error. Founders build, test, and then pivot. When it comes to due diligence matters, trial and error can get extremely expensive. Though some may view these requirements as unnecessary burdens, they offer long-term value. As a startup, you have the challenge of building a product quickly while ensuring due diligence requirements. Keep in mind that this is what sets you apart and prepares you for large-scale acquisitions.
Here’s a checklist for startups to perform pre-acquisition due diligence Read here
Technology due diligence — Buyers & Seller Strategies
Buyer Perspective
- Tailor your approach: Frequent buyers should have a plan for each acquisition, as each product is unique and requires a tailored assessment.
- Objectivity is key: Ensure your assessments are impartial to guarantee successful post-merger development and integration.
Seller Perspective
- Be prepared: Proactive preparation for technology due diligence helps address potential red flags and boosts your attractiveness to buyers.
- Mitigate risks: Identify and address potential issues beforehand to avoid jeopardizing deals.
Conclusion
- Financial, Tax, and Legal due diligence often carry more weight and have a higher influence on the acquisition decision. However, Technical due diligence is not just a formality; it’s a strategic tool for both buyers and sellers and the findings can be used as a negotiation tactic to extract concessions from the seller, without necessarily derailing the entire deal.
- Buyers and sellers should approach this process with their own objectives. By investing in quality software development and conducting thorough due diligence, Large companies and startups can secure better deals and pave the way for successful integration.
Credits:
The insights shared by Ananth Srinivasan, Shashi Mahadevappa, and Suresh Babu Sathiyakumar were invaluable and greatly appreciated.
