• Posted 28 August
  • 4 m read

Avoiding Frankenstein creations in tech mergers and acquisitions

By Sarah Burnett

Mergers and acquisitions in the tech sector often lead to big headlines and create a buzz in the market. The news of Walmart joining forces with Microsoft to acquire TikTok is certainly making waves in the US, a week after Oracle joined the fray. But there is a risk that when good products from cool and agile start-ups get acquired by larger companies, they never see the light of day again – or at least not before becoming poorly integrated Frankenstein creations that scare customers away.

While Microsoft has done really well with LinkedIn, other attempts by large companies to succeed in social media, such as Google Dodgeball, have not gone so swimmingly. But the times are changing and Facebook has shown what it takes: the click economy, easy advertising revenues, and connecting with the next generation of consumers. These mega companies need to keep up; not being in the cool category, they have to acquire it (however hard it may be to imagine Oracle’s Larry Ellison getting off his yacht and getting down with the kids).

So what does it take to make a success of acquiring something that is so far removed from the potential buyers’ normal established line of business? There is an art to post-acquisition company integration, and so much of it is about the mindset, the culture and target clients of the acquired company. Buyers beware: it is not easy to get right.

A little autonomy can go a long way

To avoid the creation of a monstrous Frankenstein offering as a result of poor integration of services and complex technologies, it is worth considering if the acquired company can run on its own for a time. Allowing an acquired vendor to run semi-autonomously makes a lot of sense. It can continue to generate revenue while the two companies work on redesigning and integrating their technologies, workforce and culture.

It is vital that acquiring executives listen to the leadership of the company that they have taken over, when it comes to product development and marketing strategies. Often their views are brushed aside because the acquiring executives have other priorities. This is a surefire way of sending the product to its grave. Market experience really matters when it comes to messaging and targeting the right customer groups to keep sales going.

All too often, a lack of continued faith and investment in the acquired product allows it to become all-but-forgotten legacy. It is too easy for an executive team to lose focus in the face of other business priorities, or simply fail to understand the potential of the acquired product and minimise its R&D investment.

Cultural integration: the invisible hand of successful M&A

Finally, I cannot finish this piece without talking about staff. Having worked for a company that got acquired multiple times, I am only too aware of the unsettling effects of an acquisition on staff. As a company, you cannot be fast enough in terms of informing the staff about what is happening and what they should expect. This should be followed by frequent updates and transparency.

Addressing corporate culture head-on is essential. According to McKinsey, some 95% of executives describe cultural fit as critical to the success of integration. Tribes and cliques can quickly form, particularly when there is uncertainty in the air. Forming combined working groups to tackle corporate integration as well as social events will go some way towards addressing these kinds of issues, but creating real harmony requires a deep understanding of the existing culture of each party: the management practices, working norms, and mindsets that characterise how work actually gets done. The culture and the values that the acquired company is known for should also form part of the integration strategy. In this way, a merger can be a unique opportunity for a cultural audit to clearly define (or even redefine) a company’s vision and values.

Ernst & Young reports that the tech sector appears to be more confident in their M&A outlook than other sectors, with 70% expecting to see M&A improve in the short term compared with 56% of non-tech respondents. For some, M&A could prove an invaluable lever to accelerate recovery over the next eighteen months – but only to those that take a holistic approach to integration, taking into account their people, culture, and core appeal of their software products, while keeping the Frankenstein fable in mind.

Posted by Sarah Burnett on August 28, 2020 in Business Resilience category
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