What to do when your IT vendor gets acquired
It never fails. You go through an extended RFP process, testing, and implementation. You finally get a new product integrated smoothly into your production system. And then you open up the newspaper to find out your vendor has just been acquired—perhaps by a vendor you rejected on the first round. Now what?
We’ve seen a lot of mergers and acquisitions over the years, in both good economies and poor ones. It’s smart to be prepared. Obviously, all acquisitions aren’t inherently bad. Sometimes a merger really does create a "chocolate and peanut butter" combination. But even in the best of cases, having one of your IT vendors acquired involves some disruption for your company and its IT staff.
Why do vendors acquire each other?
Nobody likes change. So why do vendors feel the need to acquire each other in the first place? The answer is inherent in the way many companies in the IT market are funded, writes Brian Sommer, a former senior director of Andersen Consulting’s global Software Intelligence unit and now a consultant for Vital Analysis and prolific blogger. Most vendors are funded through venture capital or private equity backing, unless they’re a publicly traded firm—in which case they have a fiduciary responsibility to their shareholders. And, naturally, those people want their money back, with a profit.
“Make no mistake, when venture capitalists or private equity firms put money into a software firm, they expect to have a ‘liquidity event’ in a few years so that their previously illiquid investment can now be sold at many multiples of their original investment,” Sommer writes. “By and large, these investors do not intend to hold these investments indefinitely and will likely drive a liquidity event in a few years. …They’ll throw their customers under a bus to get a huge deal valuation, a pile of cash and an early retirement.”
Almost no acquirer retains all the best talent that comes with the acquired vendor.
Beyond the finances, there are three main reasons vendors acquire each other. Some hold promise for customers, and others do not. For example, the acquirer may gain access to new technology, which can result in increased investment in the application. Alternatively, the new owner may gain maintenance revenues from an older application with a large installed base; the software may stay alive but may not be enhanced with new bells and whistles. The last reason is the most problematic for existing customers: when a vendor aims to grow its customer base by buying a competitor. If your software is the one being acquired, don't expect it to be around for long.
According to Gary Audin, president of Delphi Inc. and a communications and security consultant, other reasons why vendors acquire each other include:
- To expand their geographic footprint
- To expand their image
- It’s a good deal financially
“These justifications for the company acquisition have little to do with benefiting you, the customer, except that the acquired company may have been near closure and bankruptcy,” Audin says.
What can you expect from an acquisition?
No matter how benevolent and good-intentioned the acquirer, an acquisition results in change. That’s due to the mechanics of purchasing decisions, explains Jeffrey Bolden, managing partner and technical architect for Blue Lotus Systems Integration and Data Conversion. For a typical company, he says, a small number of items, maybe 10 percent of inventory, produces a large amount of its sales, say 80 percent. While a company stocks up on more products, it doesn't produce much in sales. “Everything else consists of making you feel like you’re being more diverse than you are, but you’re picking products that are familiar,” he says. The new company may not keep in stock the 10 percent of its inventory that you most need.
In addition, as time goes on, the company culture will change, Bolden says. Let’s say Company A acquires Company B. As the Company B management leaves or is let go and Company A starts to bring in new people, chances are it will choose staff who are more like Company A. Over time, Company B’s culture changes. “You, as a customer who picked B over A, will see it become more like A and it doesn’t feel like B anymore,” he says.
Company B employees may not be thrilled with the change, either, which can affect their morale and willingness to stay with the new organization. Acquisitions are a time of high uncertainty for staff at both companies. If the Company B team become less invested in providing the service that you came to expect, you will see a difference in the quality of service delivered. Quality might improve—particularly if an influx of cash enables the acquired company to invest in needed resources—but don’t count on it.
Other potential changes include:
- Paring of the acquired company’s operations, particularly in cost centers such as marketing and back-office groups, to cut short-term costs and help the acquiring company achieve a better short-term return on its investment.
- Cuts in product development.
- Sales of some of the company’s product line to yet another company to finance the acquisition.
- Changes in the timeline for delivering new enhancements, upgrades, or products.
- Demise of the product line, forcing you to migrate to the acquiring company’s competing product. “Almost no acquirer ever says, in their first press release, that all investments in major architectural overhauls will now stop for one or more of the combined product lines, but that’s exactly what does happen,” writes Naomi Bloom, managing partner of Bloom & Wallace, in "Vendor Consolidation Fairy Tales."
- Increases in maintenance and support costs, or end of maintenance altogether for the acquired product.
- Aggressive cross-selling (i.e., to have the acquiring company market its products to you).
- Aggressive marketing spin about how much “you’re valued as a customer.”
- Departures of key executives, including anyone who made you promises.
“Almost no acquirer is ever able to retain all the best talent that comes with the acquired vendor,” Bloom writes. “Great software people quickly notice if their products aren’t going to be the next-generation platform for the consolidated company, and they pick up their marbles and leave.”
Take promises for an integrated or rewritten product line with a grain of salt. “Realize that the track record for these promises in the industry is very spotty,” writes Sommer. “It’s easy for a vendor to craft a vision for a new product line, but it’s considerably harder to deliver it (and harder still to do so in a short amount of time).”
How can you protect your company after a vendor acquisition?
First, plan for vendor acquisitions before they happen, rather than trying to pick up the pieces afterwards.
“As an IT administrator, if I'm not buying from a tier 1 manufacturer…I have to consider who might buy this company when I make a purchase,” says David Schwartzstein, a marketing manager at PC Mall. “For example, as an IT admin, you may have sworn off buying Company A because of bad service experiences, but if you bought Company B storage last year, you're now stuck with Company A support."
Needless to say, you need to communicate with your vendors. Join their customer advisory boards if possible, writes Jason Busch, managing director of Azul Partners, a boutique advisory firm, and editor of the sourcing, trade, and supply chain blog Spend Matters.
Other ways to protect yourself include:
- Create a list of probable targets for acquisition in your supply base.
- Tier suppliers based on a potential acquisition's impact.
- Put a program in place that actively monitors for acquisition activity.
- Make a judgment call: If you are a relatively small customer, how do you ensure you’re not de-prioritized in favor of more important clients following an acquisition?
You may want to include a “material change of control” clause in contracts with IT vendors. In other words, if a company gets bought or even if a certain number of members of company leadership leave—depending on how you write the clause—you have the right to end your contract with the vendor.
Sommer is a big proponent of such clauses. “Starting back in the early 1990s, I insisted that clients get one for application software they licensed,” he writes, noting that users invest in a product license, consulting fees, maintenance costs, and so on—all of which could go down the drain in an acquisition.
What should a material change of control clause ask for? “[Y]ou can (and should) ask for software source code escrow, but you need to carefully word the deal so that you get license, maintenance, and implementation monies returned/reimbursed if the vendor is sold (or sells the software product line) to another firm during the first year or so of licensing the product,” recommends Sommer. “[I]f your deal helped make this vendor a rising star in their space, shouldn’t your firm get some of the upside that accrues to them when this growth triggers a meteoric market valuation for the company?” The material change of control clause should cover asset sales, acquisition, divestiture, loss of founder, and insolvency.
And while you’re looking at your contract, watch for terms like "then-current pricing" or "then-current policy.” Effectively, such terms permit an acquiring vendor to change pricing and maintenance terms at its discretion. To avoid that, prices (including annual maintenance) should be specifically written into the contract or consist of an inflationary adjustment. And in general, when an acquisition is announced, read over your existing contract to make sure you’re familiar with its terms.
What steps should you take after an acquisition is announced?
“My first piece of advice would be: Just relax,” writes B.J. Schone, a learning technology specialist and blogger. He’s covering acquisitions in learning software, but his advice still applies. “The process of merging two businesses generally takes a while. You most likely won’t see any overnight changes. Take this time to think through several scenarios and prepare a list of questions for your account representative.”
What sort of questions? Schone has a list (to which some of his readers added):
- Why (specifically) was the company acquired?
- How will the roadmap change?
- Will the underlying technologies change?
- What products, services, features, etc., of the acquirer will be made available to clients of the acquiree?
- How will the support model change for the acquiree, if at all?
- Will the hourly rate change for the acquiree (e.g., for customizations)?
- Will any technical or support contacts change?
- Will there (still?) be an annual conference for the product and its users?
- Will any product features be phased out or modified in the short term?
- Do you expect any dramatic pricing changes once my contract is up for renewal?
- If this product is to be merged with the parent company product, how will my customizations be preserved?
Don’t rely just on the acquiring vendor’s word for it, either. Talk to other users and analysts, and research what’s said about the acquisition in the media.
And while you’re at it, make sure the product is still important to your company. Is it old enough that you should think about replacing it anyway? Or minor enough that it could be replaced by something from another vendor that might be willing to make a deal?
As always, communication is crucial. Be vocal to your account manager about what you want going forward, recommends Sarah Baker, director of operations for mSpot. “They may be more sensitive to your requests as the company works to retain the customer base,” she says.
“Customer retention is vital in mergers as customer maintenance fees provide a significant percentage of the income to the company,” notes Sharon Crawford of Quocirca.
Baker also suggests that you check in more often with your account manager for at least six months after the organizations have merged, inquiring about aspects such as policy and process changes post-merger and how your contract, cost, new offers, and so on are affected.
Increasing communication goes for all the people from your existing vendor. Try to engage them in your situation; try to use the change to build and strengthen your relationship. And look for signs of a problem. “If customer service levels in areas such as support, training, or marketing drop, this is a warning sign that your community and/or product is not on the strategic radar,” says Crawford.
Also be sure to communicate to your executive team about the acquisition and what you see as the risks and opportunities. “Then, if you need to jump when things go bad, they won’t be surprised,” Baker says.
Finally, get involved with users of the product in other companies. There’s strength in numbers, and a bunch of users speaking in a united voice is more powerful than individuals. “Typically, the vendors will be looking for key vertical sectors to concentrate on and listening to what the customers need,” Crawford writes. “In a mature market, the loudest customer voice is likely to influence the development spend.”
And be prepared to alert the media. “A single unhappy customer sharing information about declines in service levels or other issues can be far more damaging to a vendor's top line and general market reputation than the single P&L contribution your organization generates for it,” writes Busch. “When in doubt, escalate internally with your vendor and share your plans to check in with consultants, analysts, or others to see if other customers are facing similar challenges following an acquisition.”
It’s easy to feel helpless after a vendor acquisition. But keep in mind that chances are the acquiring vendor wants to keep you as a customer. You still have power. Don't be afraid to use it.
What to watch for pre- and post-merger: Lessons for leaders
- Expect a culture shift when a company is acquired. It may not be immediate, but it’s inevitable.
- Prepare for vendor acquisitions, especially in up-and-coming technologies. Contemplate, ahead of time, how your business should respond to the change.
- Consider adding a “material change of control” clause in vendor contracts to give you an escape, should the business be acquired.
This article/content was written by the individual writer identified and does not necessarily reflect the view of Hewlett Packard Enterprise Company.