CEO Monetization Playbook…Strategy #4: Mergers & Acquisitions (M&A)

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This is part 4 in a 5 part monetization playbook for software digital transformation.

You can catch up on the first three strategies here:
Repackage to Recurring Revenue and Flexible Consumption Models
Product-as-a-Service
Launching New Flexible Consumption Offerings and Running a Hybrid Business Model

Here we dig into the fourth of the multi-prong strategies for monetizing new services: Mergers & Acquisitions (M&A).

Summary

More and more companies in high tech are looking to grow their service arm, specifically because they know that companies with customer-centric business models are getting better valuations—valuations that may not be achievable via traditional business models. With the M&A monetization strategy, legacy software works its way into a flexible consumption model through the acquisition of SaaS pure plays (and, occasionally, through a merger).

In particular, we are seeing an evolution in the hardware/software world towards acquiring more subscription savvy companies featuring recurring revenue models. Recent examples include SAP’s $8 billion acquisition of Qualtrics—putting a stake in the ground of the new digital world with a “land grab” into the emerging experience software (EX) space to complement their existing traditional business in operational software (OX); IBM acquiring Red Hat for $34 billion to “unlock true value of the cloud” for their business (according to a recent press release); Salesforce with their big acquisition arm continually taking on new companies, including its recent acquisition of ClickSoftware to bolster its field service; and Alphabet / Google consistently acquiring pre-revenue companies in the subscription world to “enhanc[e] the technical capability of its cloud applications”—to name just a few.

Every time a company goes through an acquisition, they are faced with a whole new set of people, processes, and technology. The challenge is in merging two entities. As a company, we experienced these challenges first-hand, first when we acquired FrontLeaf, a subscriber experience analytics application, in 2015, and again, in 2017 when we acquired Leeyo, the leader in revenue recognition automation (now Zuora RevPro).

M&A is a complex process. Most companies today are acquiring or merging with high-growth companies that are focused on recurring revenue business models. These companies are agile and nimble, and it is critical for the acquirer to maintain this agility and nimbleness via processes and systems. The next step is enabling sales acceleration via upsell and cross-sell between the acquirer and the acquired. To enable high growth in the SaaS business, it’s just as important to foster soft synergies (e.g. sales acceleration) as hard synergies (e.g. cost savings).

The goal is to optimize opportunities to cross sell and upsell both the new product lines as well as the legacy line of business, without stunting the growth of the acquired company. To do so, you need to create an infrastructure that will enable sales to easily sell new products along with the old. From a technology standpoint, acquiring companies require a standardized platform that allows for the sale of both legacy products and recurring revenue offerings—and a streamlined order-to-revenue process across business lines—all on one system.

With the right infrastructure, companies can sell any kind of flexible consumption model and offer a seamless order-to-revenue process, both for customers as well as for the company.

With a successful acquisition, the customer experience is consistent, with quotes, invoices, and billing all coming out of one system—regardless of what product line they subscribe to. And the customer view is also consistent, with all customer-related metrics coming from one system offering a unified view, rather than a skewed perspective derived from mixing and matching info from disparate systems.

With visibility into key subscription metrics like customer lifetime values, customer acquisition costs, churn rates, and net dollar retention all available within one system, companies can make better decisions based on live data thus optimizing the value from acquisitions.

Building a monetization M&A-friendly platform plays an important role in facilitating a repeatable process to successfully integrate new companies and accelerate a pivot to SaaS.

“Every company is becoming a software company and the transformational change that as-a -Service software delivery challenges incumbents with is to pivot their businesses to new models, often in the form of very large acquisitions.” Tomasz Tunguz, VC at Redpoint

Customer Examples

Demandware, VMware, Terapeak, Hitachi Vantara, Atlassian

Use Case

Growth by acquisition for recurring revenue line of business

Pros

– Jumpstart digital transformation by injecting SaaS DNA into existing company DNA
– Land grab for existing line of recurring revenue
– Cross sell opportunities: legacy software can sell new product to their install base and sell into the customer base of the acquired company

Cons

– Only viable for software companies with cash reserves that can afford the upfront financial investment of an acquisition
– Challenge to integrate SaaS business in with legacy business in terms of people, process, and technology—companies risk breaking the order-to-revenue process and killing the agility of the acquired company
– Acquisition alone won’t transform your business into a SaaS business unless you absorb and apply SaaS learnings across your organization

Customer Story

Industry-leading cyber security software company Symantec was founded in 1982, and made its first acquisition shortly after, in 1984. With 50+ acquisitions to date, M&A is clearly built into its DNA and has helped to make it the powerhouse that it is today.

But a few years ago, they found their position in the security space threatened by the launch of smaller, more nimble SaaS startups. To compete with this heavy competition, they decided to make the shift into a a security-as-a-service provider, flipping the switch to transform their entire model.

As a 30+ year old company with many acquisitions folded into their main business, they had accumulated a complex IT ecosystem with multiple ERPs, quote-to-cash systems, and literally thousands of SKUs for every product they sold. A staggering 90% of their order-to-cash process was performed manually.

In 2015 they implemented Zuora, consolidating their complex IT ecosystem onto one platform.

Since implementing Zuora, Symantec has made a number of acquisitions including Blue Coat Systems (cyber security) in June 2016, LifeLock (identity theft protection) in November 2016, and Fireglass (malware prevention) in July 2017. With Zuora, they’ve been able to standardize their order-to-revenue operations with a unified salesforce, a unified billing experience, and a unified customer experience. The result? A huge leap from -2% to 29% growth YoY.

“We made a strategic bet on Zuora as part of our global subscription platform to run our digital order-to-cash system for our cloud product and services because it offers a unique frictionless experience for our customers and partners … choosing Zuora has helped us eliminate SKUs, simplify our pricing, and allow our customers and partners to consume our products and services the way that makes the most sense for them.” Sheila Jordan, CIO, Symantec

Bottomline

An increasing number of businesses—software/hardware and otherwise—are acquiring companies to drive subscription revenue. For larger established software enterprises, acquisition can be easier than full-on transformation. And the organizational knowledge brought by native SaaS companies is invaluable for legacy software companies.

At the heart of all of this M&A activity isn’t just a desire to build out or complement product offerings, or to subsume competitors, but a strategic play to jumpstart necessary digital transformation.

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