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M&A in the IT industry challenges dealmakers and end-users alike.
Tim Burke, CFO Europe Magazine
September 3, 2008
Plenty of M&A deals have an unwanted impact on someone, be it the executive who loses out in a boardroom reshuffle or the shareholder whose holdings are diluted. In the technology industry, there's another knock-on effect: a deal can aggravate the acquired company's customers, whose CFO and CIO worry that the software or hardware their organisation relies on will be mismanaged or discontinued once in a new owner's hands.
Such deals abound. Last year, consolidation in the software and IT services sectors helped increase the value of global technology M&A by 44%, to €127 billion, according to PricewaterhouseCoopers. And even though global dealmaking has seen better times, there are still plenty of notable deals being sealed, from Hewlett Packard's multi-billion dollar takeover of services provider EDS in May to smaller acquisitions such as Swiss banking software provider Temenos buying UK peer Financial Objects in July. Analysis from investment bank Regent Associates shows that the volume of deals in Europe's software sector during the first half of 2008 remained almost exactly the same as during the equivalent period in 2007.
For customers of these dealmaking companies who want to make sure that their IT investments won't be rendered useless, there is no shortage of advice. Third-party firms such as Rimini Street and netCustomer support ERP products after they are discontinued. Meanwhile, the IT firms — both predator and prey — are doing their best to capitalise on customers' concerns. Witness SAP's Safe Passage initiative, designed to attract former customers of vendors acquired by the German firm's rivals.
Corporate IT customers can also take matters into their own hands. Jean Louis Previdi, a director at research firm Gartner who studies the effect of M&A on IT end users, says companies should analyse a vendor's risk of being acquired, "screening and scoring" suppliers based on the likelihood of them being bought. Second, map out a worst-case scenario and a contingency plan for if, say, a key vendor disappears.
The fate of acquired customers also preoccupies IT executives. According to James Beer, CFO of US software house Symantec, contracts and services are "absolutely one of the key concerns" for customers, clients and partners when a company they work with is taken over.
Beer recalls that after Symantec bought a smaller US software house, Altiris, PC maker Dell, which distributed Altiris products, was "very concerned" about how the deal affected its relationship with the acquired firm. In such a situation, clear communication is always key. "There's a process of reaching out very quickly once the deal is announced to the key customers to ensure they understand that there is a commitment [to the acquired products]," Beer says. "Once you do that, things tend to calm down fairly quickly. Then it's a matter of [the customer saying] 'OK, that was good to hear, now let's actually see it happen in action.'"
Rob Schriesheim, CFO of Lawson Software in the US, which merged with Sweden's Intentia in 2006, agrees that keeping customers onside is crucial. He admits, however, that it's common for acquirers to increase maintenance fees customers pay on legacy products while cutting back investment in those offerings, before migrating customers across to their own products to bring in yet more fees.
With IT M&A activity continuing, forewarned is forearmed.
Tim Burke is senior staff writer at CFO Europe.