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March 16, 2017

The M&A Acceleration Effect

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The history of M&A is filled with stories of young entrepreneurs with great intelligence—and great timing. These stories always start with an ambitious new player who aligned their strengths and exploited the new gap left in the market by the acquisition to grow and gain competitive advantage.

Timing is always critical, especially in the current tech market, where IPO activity is still slow, and M&A is considered a significant path for growth—particularly for software startups. In fact, 2016 software deals totaled $115 billion, according to Bloomberg, which included Microsoft’s $26 billion blockbuster deal for LinkedIn. Worth noting, Microsoft partnered with LinkedIn before acquiring it.

Two areas of focus for startups in today’s brisk M&A market are: product partnerships where a startup’s complementary technology helps a larger player expand its market footprint; and opportunistic partnering, which involves young companies whose technology is strategic to a larger player looking to counter a competitor’s acquisition.

Most product partnerships precede M&A deals because these joint business efforts demonstrate two companies can work together and build greater value for customers.

Partnerships help companies see if they can work together, if there’s a cultural fit and if the products fit well together. Recent examples of partnerships that preceded an acquisition include Microsoft and LinkedIn as well as Oracle and NetSuite.

These pairings often come about because customers are buying both company’s products, which eventually brings the two companies together organically. Sometimes it starts as a way to provide better customer success to their joint customers, and often can expand into a go-to-market partnership.

When product partnerships work well and the pairing creates momentum for the combined offering, it creates an “acceleration effect” in the marketplace because it can propel a third player with similar technology to new heights. For example, Oracle’s acquisition of NetSuite allowed it to pair its Oracle CRM product with NetSuite for customers. Oracle’s competitor, Salesforce CRM, however, doesn’t have a comparable in the wake of the acquisition, which creates an acceleration effect for Salesforce partner, Intacct. This situation also played itself out when SAP acquired of Ariba in 2012, which created an acceleration effect for Coupa and helped propel its business and eventually led to going public in October of 2016

In any active market space, there are multiple competitors and startups need to stay aware of the threats and opportunities ahead. Here are four pointers to think about as the M&A market unfolds in 2017.

1. Partnerships are one way to outflank your competitor
2. Any partnership should amplify what you’re already doing
3. Monitor the M&A players in your market segment and respond immediately to developments
4. Determine what other products customers are using in conjunction with your product. How does using another product in conjunction with your product benefit customers?

Great companies often arise from the chaos of a highly competitive market. For ambitious startup CEOs who are looking for the next big opportunity, survey the market and determine who is going to be your friend and who your enemy.