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More than half (54%) of all European software leaders have over the past three years engaged in M&As (mergers and acquisitions) as part of their efforts to achieve more growth. Looking ahead, M&A will remain an integral part of future ambitions, according to a report from strategy consultancy EY-Parthenon in association with Potloc.
The software industry is fiercely competitive, with new startups and emerging innovations a constant source of disruption. M&A has long been one of the primary drivers of growth for companies in this sector, with deals opening up benefits such as scale, an enlarged software portfolio, geographic expansion, access to talent, cost synergies, and more.
The report from EY-Parthenon and Potloc found that following the post-pandemic downturn in M&A activity in the software sector, which coincided with the overall economic headwinds being felt since the pandemic, M&A activity has since then rebounded somewhat.
Among the 300 CTOs surveyed across Europe, M&A still is seen by most leaders as the best way to boost market share, bring in new talent and capabilities, and leverage new technologies without the need to develop them in-house.
Bron: EY-Parthenon, Potloc
Synergies
“The key driver of M&A in the software market is product synergies. Product synergies may involve developing new and differentiated customer value propositions, integrating features, and building integrations or unified platforms to enable cross-sell,” explained Sander van Weele, partner at EY Parthenon.
Indeed, it is product synergy – when the products and services of merging or acquired companies are complementary and make each other more valuable – that 46% of respondents said is their top reason to pursue acquisitions.
Most software CTOs see cost synergies as the second most common reason for pursuing acquisitions. This advantage is gained when a company is able to optimize their operations by consolidating technology and human resources after an M&A deal, ultimately leading to more efficient software maintenance but also increased scalability and agility.
Bron: EY-Parthenon, Potloc
These synergies are however notoriously challenging to realize, said Erik Oltmans, partner at EY Parthenon. “And by focusing on these front-end product synergies, less time and attention is spent on integration and improvements at the back end of the products acquired. Only 41% of respondents indicate that they integrate technologies, and even fewer (21%) harmonize the entire technology stack, even though these typically enable cost synergies through operating leverage effects.”
Expanded access to new human capital and additional market access are also key benefits that software companies look for when considering M&As. Though perhaps less important, these still offer huge value and can make or break software companies, considering the tight competition.
Interestingly, 98% of respondents said they use external advisors when completing the integration process after their company merges or acquires another company. That is because of the complexity of the process, which can be delicate and tedious. Additionally, very large deals may require close alignment with regulatory bodies, such as antitrust of industry watchdogs, which makes external experience all the more valuable.
Integration
Not all M&A deals are made alike: Some will result in a full integration of one company into another, while others ultimately give more independence to the different entities. Some integrations are completed in as little as six months, while others can take up to several years.
Bron: EY-Parthenon, Potloc
A total of 70% of respondents told EY-Parthenon that the main way they unlock product synergies is by integrating product frontends and harmonizing user experience across products in order to unlock cross-sell opportunities. 59% said that integrating product R&D governance is more important.
When it comes to cost synergies that come out of financial transactions, 80% of CTOs said that integrating the R&D function is the most important thing to aim for. “This typically include harmonizing policies and processes, sharing best practices between teams, and centralizing functions such as architecture, quality assurance, and security,” said Oltmans.
Hosting challenges
In the world of software, M&A deals can easily lead to hosting fragmentation, with different companies using different cloud strategies and hosting setups. That can then lead to challenges in compliance, scalability, security, and data protection.
Bron: EY-Parthenon, Potloc
“The survey results indicate that software companies tend to use similar deployment models regardless of their size,” said Van Weele.
“Thus, a company’s deployment approach is more likely based on its long-term strategy and constraints (such as regulatory requirements), rather than being a major factor in enabling or limiting the company’s growth. In other words, as software companies scale, they generally do not need to change their hosting deployment model.”
Many software companies opt for cloud storage, thanks to the flexibility it offers and the ability to quickly scale up or down. Cloud solutions have become huge in the tech world in recent years, as it becomes increasingly difficult to store the huge amounts of data required for things like innovative AI tools.
Beyond software
Outside of just the software sector, there has been notable optimism in the wider European M&A market this year. That is relative to last year, which saw somewhat slow M&A activity.
With global macroeconomic troubles still lingering – from inflation to geopolitical instability – investors and stakeholders have been a bit more likely to act with heightened caution. There has also been a notable increase in technology due diligence, with strategics and financial sponsors placing more focus on ensuring that investments are robust and responsible.
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