by Richard Eichen, Partner, Fortium Partners
Q4-2019, sitting in a conference room, getting ready for a potential strategic vendor to set up and defend their RFP response. We asked the sales rep if there was any ongoing concern risk as the same PE firm owned both his company and his arch competitor, and a merger seemed logical and inevitable. As expected, the sales rep denied any potential risk. So, it was no surprise when in early 2020, their merger was announced by the PE fund, with our second choice as the surviving entity. As CIOs, what do we do when a critical vendor is merged and goes way?
First, some context from the inside of a software company when it is acquired. Sitting in my office early one day and catching up on the news, I noticed our logo in a tombstone ad. An aggressive accumulator had bought us (we’ll call it ‘X’ here), infamous for buying companies for their user bases, freezing R&D and marketing, and having their call centers cross-sell their other products into the target’s user base. When we told our customers, ‘X’ was our new owner, almost 100% said they would drop our products. ‘X,’ per their industry reputation, rapidly cut all R&D, all marketing, reduced support to basic levels, and cut the enterprise-grade direct sales force to a bare minimum. Those customers who chose to keep our products were not in good shape.
How does a company protect itself when a key vendor merges as the non-surviving entity or otherwise acquired? We’ve invested in integrating them into our stack, have internal expertise on their APIs and data models, and provide Level 1 and 2 support. We have contracts in place with strict SLAs and beneficial pricing based on current and projected usage. The Training Dept has integrated this software into their new employee orientation, complete with slides, manuals, and an exam. Hopefully, our contracts have a material change of control provision, giving us some leverage.
Below are some of the considerations which will help determine if you continue using the software or begin searching for a replacement, organized into two buckets, Strategic and Operational:
- If acquired by an accumulator or a PE fund, does our vendor’s product strategy and direction fit into the overall strategy and time horizon, or is this pure financial opportunism, subject to another change within the next 24 months?
- Does the acquirer hold their companies for the usual 3-5 years, or is this a fix and flip?
- Many PE firms load an acquisition’s Balance Sheet with considerable debt, shortly after that declaring an extraordinary dividend to remove as much cash as they can, upfront. It’s how the industry works, and this is well known and accepted practice. What guarantees can we get to ensure the acquired company and any merged entity will survive for our contract term (ongoing enterprise risk)?
- Assuming Vendor Rationalization is in effect, and the acquirer is not on our list, can we terminate the contract, and if so, who pays for data migration?
- If we already have contracts with the acquirer, can we normalize the termination dates and negotiate a better set of terms across all products?
- Will our existing contract continue to be in effect? Will it be renewed at logical and expected terms, or will the new owner run out the clock and then start with their standard, and we must ultimately renegotiate, at our risk? What is the acquirer’s history regarding preserving business models?
- As new regulations on Data Privacy, statutory reporting, and verifications, as well as Gov’t program billing, come into effect, does the new owner have a positive history of rapidly funding these mandatory changes within their portfolio?
- We negotiated tight SLAs. If ours are more stringent than the acquirer’s standard, will they try to convert them to KPIs, without default penalties?
- We have identified vital vendor personnel (executive, development, support, and training) and need to know if they remain, or will these functions be absorbed into other operations? Most likely, much senior staff will leave within the first 18 months, can we get all outstanding commitments and understandings in writing?
- Is the published product roadmap in effect, including those key enhancements and new features we were counting on to provide better service to our internal users?
- If multiple products in the acquirer’s portfolio will be consolidated into one offering, how can we provide input into which modules survive? What is the migration path, including any customizations and APIs, as well as data migration?
- Will, the R&D team continue in-place, and for how long? Will R&D on our product continue at the current funding rate and new release cadence? Is the product being frozen, and if so, will the new owner at least fund identified bug fixes?
- Will our internal customer support team remain in place, with empowerment, and for how long? Will they remain dedicated to this product line or be shared across multiples? If named in our contracts, will they be named in all new contracts?
- Is the Business Continuity plan still in effect?
Having a strategic technology vendor acquired by a PE firm or an aggregator is not necessarily a bad thing. It can result in a more stable company, with better senior leadership, access to capital, and a better business model. None the less, prudence is required.