Risk and Opportunity in the Changing World of M&A
It doesn’t have to be scary when you get that call that informs you your solution partner has a new name.
Good Morning! If you’re an insurance CIO or COO, you’ve probably received that breathless call from your software company’s salesperson: “Good morning, Jim, I’m calling to tell you about our exciting news.” You may ask yourself “does ‘our news’ include me?” I assure you that most leaders quickly discover that the answer is yes. It could be exciting for ‘us.’
Leveraging M&A isn’t always easy because bad outcomes are equally likely. It is particularly difficult when firms don’t manage vendor procurement and product usage with a future acquisition in mind. We have found the following steps will achieve better outcomes.
1. Determine the intention of the acquirer
After getting the call, always analyze whether the acquirer is a strategic or a financial buyer. Strategic buyers acquire companies that fill out their portfolio of products or services. These buyers have an investment-based focus and tend to expand the acquired company’s capabilities. Many of the acquired companies’ executives and customer-facing employees stay on board.
Financial buyers seek to increase profitability by consolidating operations and cutting investment. They buy a stream of current contract revenues and a list of prospects for their offerings.
Generally, with a financial buyer, the acquired company staff melts away as they are let go or seek better opportunities. This can be disruptive, particularly if the vendor contracts in place are informal, incomplete or don’t represent what the vendor is doing.
When the two firms are large and have diverse offerings, this same analysis should be applied to both firms’ products or services that you use.
2. Plan for an ownership change
The time to leverage an acquisition is before it occurs. Pay attention to contract clauses like assignment and term. Secure a right of approval to assignment to provides options for negotiations. Limiting these rights is a double-edged sword; you may want to freely assign the license, too. If you have products or services that have high switching costs, a longer term ensures you have better prospects for maintaining or improving service. For some vendor offerings, a short duration can support multi-vendor competition for your business. It may be time for an RFP.
3. Develop an agenda for strategic buyers
Strategic buyers are keen to find out if the clients are satisfied and also their buying intentions. Now is the time to present your desires for enhancements and new capabilities. They are looking to invest; you need to steer that investment. If you are unhappy, indicate how you want them to remediate the product or service, otherwise you won’t be increasing your spending on the combined companies and may even reduce it.
Keep in mind that if you are a happy client of both firms, you are now more important than you were before. Seek greater participation in customer advisory boards, discounts for new purchases, and collaborate to reduce sales and service costs that can be passed on to you.
4. Addressing their needs will meet yours, too
As a CIO, I was fortunate that most of the calls I received were related to strategic buyers. One time, a financial buyer acquired a company that was important to our future. Seeing the announcement and without waiting for the call, I contacted the acquirer CEO, congratulated him, and then underscored how important continued development of the acquired companies’ software was to my firm. It quickly became apparent that our software was going to die on the vine. However, due to that call and subsequent meetings, the acquirer gained insight into why the new parent couldn’t easily replicate unique functionality that we used extensively. The buyer continued to invest at a reasonable pace and the software is still being used. The moral of the story: A financial buyer wants the revenue, but not the cost. If you structure your interactions to reflect that, you’ll prevent a bad outcome.
At MVP, we feel it is always useful to think about the consequences of a supplier being acquired as part of the vendor selection process. Always ask for company financials and a product/services roadmap. Monitoring ITA’s publications will keep you abreast of M&A deal flow and the publicly stated deal rationale. Combine that with timely conversations with industry consultants and analysts and you’ll have the insight needed to leverage the opportunity and prevent bad outcomes.
Russ Bostick is a founder and managing partner of MVP Advisory Group, a management-consulting firm focused on serving the insurance industry.