Originally published in (Business Computing World)
Like any other, the IT market has software vendors of different sizes ranging from small to large. The core strength of these small and medium IT vendors lies in providing a wide range of software products with deep technical expertise. What’s more, these players are more or less becoming game changers because of the incremental innovation that they bring to the market.
Besides, the market conditions favour affordable and technically superior products that take on the bigger rivals. That said, the success of many of these agile challengers makes them an attractive acquisition prospect to bigger rivals. It is not tough to guess what the customers of these acquisitions are left to deal with. This article intends to examine the advantages of acquisitions for the organisations and the resulting side effects on the customers.
First, a little bit of theory. In a business strategy, acquisitions are also known as horizontal integration. It is an integration that occurs when a firm is being taken over by, or merged with, another firm which is in the same industry. The goal of such integrations is to:
- Venture into new businesses and markets
- Increase the market share
- Consolidate and monopolise the market
The primary reason for acquisitions in the IT industry is to enhance the business portfolio and reduce the competition. This helps organisations become a dominant player in the market. If we look at a few classic cases of IT companies on an acquisition spree, it is easy to decipher the issues faced by the customers of the acquired companies.
Acquisition behaviour and its impact on customers
For most big players, it is a herculean task to focus on engineering new products all the time. An inorganic growth allows them to increase the business size by acquiring smaller rivals in the same market. However, it is the customers who end up bearing the brunt of such acquisitions. Some common issues that stem from these consolidations are,
- Conflicting motives: The acquired company may have different objectives from that of the acquiring company. This impacts customer relationship in terms of SLAs (Service Level Agreement).
- Increase in product prices: The acquisition comes with a cost; it becomes difficult for the organisations involved to manage the products at the existing price points post consolidation. The implications could be an increase in the expenditures and the operational overheads, leading to an increase in price for the prospects and existing customers.
- Product Stagnation: When the organisation acquires a business in the same vertical, there is a significant chance that the scope of the product growth will hit a dead end. This is due to the lack of market expansion outside the existing customer base. In many cases it halts the product growth altogether, negatively affecting the customer.
- Calling off support for the product: Support forges the relationship between the business and customers by enforcing confidence with technical assistance to fulfill the IT service needs. Typically, a product team consists of an engineering department, a product management and the support department. All these three teams have to work coherently to understand the changing needs of the customer and meet the customer expectations. Support engineers are the front runners who play a proactive role in understanding the needs of the customers and delivering solutions instantaneously. Support is that vital link between a product and its users. Any changes in support policies post acquisitions, could adversely impact the customers.
Classic cases of acquisitions
Hardly a day goes by without some form of acquisition or another, and as a result there are numerous examples of customers losing out as a result of an IT merger.
MySQL was an open source platform and had a huge customer base. However, upon being acquired by Oracle, MySQL ceased to become a free source. From that point on, customers were asked to pay steep prices to continue using MySQL, and this led to a gradual drift away from MySQL, with customers instead opting to use other free databases.
Most recently, in an apparent attempt to expand its offerings into cloud-based information technology services for managed service providers, Solarwinds inked a deal to buy N-able technologies for 120 million dollars.
In 2007 Quest acquired ScriptLogic with the purpose of meeting the Windows management needs of SMB customers, besides adding 19,000 customers to the Quest portfolio. But the story was short lived with Dell acquiring Quest in 2013, bringing all the acquired companies under Dell management.
We can see this trend continue with examples of other acquisitions such as BMC’s acquisition of Numara and Magic solutions and Oracle’s acquisition of SUN. These examples clearly define an acquisition strategy which focuses on cashing-in on the technology competencies of smaller rivals in order to expand the organisation. This is what we refer to as ‘inorganic’ growth.
Can this be overcome?
The balance sheet is always king in the world of business, but the economic climate is forcing more and more organisations to prioritise profits over the needs of the customer. It is therefore imperative that the customer shops for the products smartly. The usual practice is to understand the product, run a few trials, and then deploy it. However, if that vendor is then acquired, the customer is often left facing the prospect of bigger bills, added complexity and lower standards of service.
As a customer, it helps to be a step ahead in terms of understanding the product strengths and looking at the vendor’s customer base. Basic research on the company’s mission and background helps. An organization which is basically a mesh of acquisitions tends to attach priority and preference to monitoring the balance sheet. On the contrary, organizations which invest in R&D and build products from the scratch gain from a thorough understanding of customer’s pain and help create an ecosystem that fosters bonds between the customer and his vendor.
Businesses are waking up to the reality of vendors who choose to acquire, rather than innovate. As time goes on, I believe we will see a shift towards those vendors with a history of solid engineering expertise, which have built solutions from the scratch, and away from those who rely on acquisitions or mergers to bridge the engineering gap – often at the cost of the customer.