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When a Large Company Buys a Small Company

by | May 22, 2016

Competitive Considerations on Technology Acquisition

As part of a small company in the large market of Content Management, I have been an observer to many interesting changes in the past few years. We play in the same space as IBM, EMC, OpenText, Oracle, HP, Onbase and Lexmark. These giant (or almost giant) companies tend to grow by product and company acquisition. But when they swallow up smaller companies, who actually benefits? Is it the customers? The employees? The partners? Or perhaps the competitors?

Some examples in the document processing and viewing space:

– IBM swallows up Daeja and Datacap (among many others) and then starts juggling its product line priorities and marketing efforts and shifting personnel to other groups
– HP buys Autonomy and later splits into two entities and starts selling off some of the acquired software products to OpenText
– Kofax swallows up a variety of companies ( 170 Systems, Atalasoft and others) and is then swallowed up itself by Lexmark, who had also bought Perceptive. Now they seem to be in the process of being acquired by a Chinese private equity group.
– OpenText buys Informative Graphics and their Brava product throwing the whole ECM industry into turmoil because their trusted supplier is now owned by a close competitor who then begins to neglect the viewer market
– EMC buys Documentum and many other companies and is now being acquired by Dell’s private equity group at the same time as the combining entity is shedding companies and products

So why are these multi-billion dollar companies buying up small, 20 million dollar companies? Even if they can double the smaller company’s sales, how much profit does a $40 million entity contribute to a corporation with billions in revenues and hundreds of millions in profit?

Simple answer – it’s not about the revenues, profits or market share. It is about internal needs of that technology. For today’s Fortune 2000, it is very often much quicker to buy technology that fits your requirements than developing it yourself. The secret is making sure you retain the engineering staff that knows how to make the technology work.

Where does that leave the ecosystem around that acquired company? If they were successful, there were partners and customers who sold, bought or used their products. In today’s world, many small companies provide essential products to the Fortune 2000. Does that synergy continue after a technology acquisition?

The unfortunate reality is that acquisitions change the purpose and goal of the acquired company. When answering to the higher authority of the acquirer, development, support, contractual services, marketing and sales can all be affected. Planned releases and features can get delayed or cancelled as features specific to the new parent are placed in higher priority.

An associated scenario which has been successful is to put the acquired technology into maintenance mode – a very profitable situation where little effort is made but recurring revenues continue to pour in.

Does this happen often? I think the answer is obvious. We read it in the headlines regularly. It is logical and it is good business…for the acquirer and the owners of the acquired company, but what about the customers and partners who are dependent on the acquired company? If you’re one of them, here are some options:

a) Buy from companies that are stable and where the ownership is focused on the products you care about
b) Support your favorite companies. Consider what it will cost your company if they disappear. Stay involved with them and monitor what’s happening in their industry. Invest in your favorite vendors to keep them independent.
c) Support System Integration companies that are familiar with your important vendors. If an acquisition occurs, they may be able to continue supporting the product.
d) Prepare for the worst. Get source code escrow. Purchase maintenance and support guarantees.
e) Stay familiar with the market and its players. Can more than one player provide what you need?

If you have any questions or would like to continue this discussion, we can discuss further in the comment section…