It looks like we’re back to the merger and acquisition frenzy again in the space, which seems to begin anew at the start of every boom in the continual boom-bust cycle that Wall Street so favours. Big cash-rich giants are again gobbling up cash-poor gnomes in an effort to bolster either the breadth of their offerings or expand their (potential) customer base. This is a good thing and a bad thing. If you’re on the market for supply management technology, or a customer of one of the cash-rich giants, this can be a good thing. If you’re a shareholder of the cash-rich giant, or a customer of the cash-poor gnome, this can be a bad thing. If you’re anyone else, it probably doesn’t affect you.
It’s probably a bad thing if you’re a shareholder of the cash-rich giant as 4 out of 5 mergers and acquisitions fail to deliver the expected value, and often fail to do so spectacularly. As Richard Roll notes in his classic paper on “The Hubris Hypothesis of Corporate Takeovers”, decision makers in acquiring firms pay too much for their targets on average. I believe this to be especially true in the enterprise software space where the value of a platform decrease at a rate that is in-line with the expected depreciation of a new car purchase. Every time a newer, better, piece of software hits the market, the value of all existing platforms drops. And since, in the enterprise software space, all acquisitions tend to do is freeze innovation on the platform of at least one party, if not both, until integration is achieved, value drops — and in this space, it’s rarely regained. While the value associated with software doesn’t disappear as fast as it does on Wall Street every time a newly created bubble finally bursts, it still disappears. And it’s not like we don’t have our own horror stories like the i2-Nike PR nightmare, the Hershey Foods WMS failure, or the ERP/MRP fiasco that brought down the multi-billion pharmaceutical Foxmeyer. And while none of these are directly related to M&A, they do demonstrate how any attempt to integrate even partially incompatible systems can wipe out hundreds of millions (or more) of value.
Similarly, if you’re a customer of the cash-poor gnome, it can also be a bad thing if your system is “locked down” until the features/functionality is integrated with the giant’s platform, that you will eventually be forced to implement (when the term of your original agreement runs out). Chances are that you bought the gnome platform because the giant platform wasn’t what you needed, was way more extensive than what you needed, or didn’t deliver enough value from the extra functionality relative to the cost.
But if you’re customer of the cash-rich giant, who, chances are, is no longer capable of innovating it’s way out of a wet paper bag, this can be a great thing. As soon as the initial integration headaches are solved, you’ll have access to new, innovative to you, functionality without having to find a new vendor, do custom integration, or even do extensive mods to the platform you have — especially if you’re using a hosted/SaaS service and it just gets enabled in the next release. And, if the giant is fair to you, as a loyal customer who had to wait, the additional cost won’t be that significant and will be drawfed by the new-found value your organization can generate.
But if you’re not a customer of the cash-rich giant or the cash-poor gnome (and not a shareholder of the cash-rich giant either), this is definitely a great thing. As we’ll delve into in more detail in a future post, when you’re on the market looking for a new supply management technology platform, you’re asking three questions (if you’re doing it right) before seriously considering a vendor: can the vendor support me, are they stable enough to support me, and are they still innovating. While it is often straight-forward to answer the first question, it’s hard to answer the second if the company is private and hard to answer the third if you’re not intimiately familiar with the space and the competition (as innovation can be relative). But if a vendor gets acquired, you know that it likely wasn’t stable enough as most companies that get acquired are cash-poor, have limited growth options on their own, or have a specific innovation or customer a cash-rich giant wants (and once a cash-rich giant sets their sights on a target, that target’s resources will be consumed with either friendly bids, or hostile bids, which would still limit its ability to support you). And if a vendor does the acquiring, then there is a good chance that it’s not innovating (at the rate it used to) or not capable of further growth without a fresh blood infusion (which would eventually limit innovation).
This means that every merger and acquisition identifies two more companies that, at the very least, should be given serious scrutiny before being added to your list of potential solution providers, if they should even make the list at all (at least until a succesful integration is completed — which, if one of the fish is really big, could take years) as a merger or acquisition usually signals a lack of innovation on one side and cash on the other. And, more importantly, it shines a light on those companies in the middle — stable, growing, and full of innovation ready and waiting to take your Supply Management practice to the next level.
A new wave of best-of-breed players is rising in the space. Since they haven’t yet been entangled by the hubris hypothesis, it might be time to give them a serious look.
