M&A in SaaS: Are You a Consolidator or the Consolidated?

The SaaS field saw incredible growth since last year, and when the demand for software skyrocketed, so did the deals made in the M&A space. As companies continuously seek long-term growth, they invest in acquisitions to establish their stance in the market. 

The following reasons make it easy to see why the software industry is getting so much attention from investors:

  • Rapid digitization
  • Profitable scaling—an increase in sales may not necessarily cause an increase in costs
  • Growing demand, especially from B2B companies
  • The resilience of the software and tech industries throughout the pandemic

However, a study by Harvard Business Review found that M&A’s failure rate is between 70% to 90%. Issues in software M&A usually stem from faults in technology integration, tech stack consolidation, security risks, and alignment of business and IT strategies. Add to the mix unstable per-user pricing that most software companies implement, and it may become more challenging to gain results.

What then are the ways to create value and ensure that the acquisition price accurately reflects it? 

Navigating a Competitive Software M&A Space

For tech companies, software company acquisitions aim not to disrupt but improve existing processes, tools, and policies. The investments are mainly for product development, attracting talent, and widening a consumer base. The edge of technology buyers over non-technology ones is that value creation is relatively slow for the latter. You often don’t see ROI until after the first two years post-acquisition. 

Below are some of the most notable acquisitions for 2021 so far:

  • Amazon’s acquisition of MGM Studios ($8.45 billion)
  • AT&T (Warner Media) ’s acquisition of Discovery ($43 billion; announced in May)
  • Microsoft’s acquisition of healthcare company Nuance Communications Inc. ($19.6 billion, announced in April)
  • Lionheart Acquisition Corp. II’s merger with MSP Recovery ($32.6 billion; announced in July)

On the other hand, non-technology buyers acquiring software companies is now a fast-growing trend, as acquisitions from technology companies dropped to 38% to 64% within a 10-year period. Strategic acquirers (such as in retail or automotive) view inter-industry acquisitions as something that can help them have an advantage over their competitors and yield more revenue, with the strategic purpose of increasing their valuation in due time.

Building a SaaS Integration Strategy

Here’s how you can build a SaaS integration strategy that will enable you to manage your tech infrastructure better and streamline the acquisition process.

  1. Get on board with revenue teams in creating an integration plan, along with key decision-makers.
  2. Assess the current state of technology and applications currently being used by both companies and contracts. What is the tech landscape? How many SaaS purchases has the company done in the past year, and are they properly accounted for? This is a critical step in consolidating the software inventory and preventing unseen issues.
  3. Work hand-in-hand with business leaders in determining the specific use cases for each application. This helps to evaluate whether applications are aligned with business objectives and have a functional purpose.
  4. Take a closer look at the security infrastructure of each application and rank them according to their breach probability. Ensure that all SaaS applications used are secure and won’t compromise the enterprise.

Gaining Value from Software M&A

In acquiring a software company, buyers must have a deep understanding of the market they’re in, the economic climate, and the factors that influence valuations. Also, having a comprehensive SaaS integration plan would give you a bird’s eye view of the potential deal, and guide your decisions throughout the entire M&A process.

Register today for the Ascent Conference 2021 to learn more about consolidation and M&A in the SaaS space, and gain insights from the best industry thought leaders.

Photography by Daniel Lloyd Blunk Fernandez via Unsplash

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