Skip to content

Evaluating Strategic tech vendors: RFP, Demo, Pilot – what about merger protection? 7 Tips to follow

August 6, 2013

End of a Quarter, 2 days to go.  The phone rings, or the End-of-the Quarter email arrives.  Ever feel vendors are trying to slam-dunk your business, offering remarkable deals expiring faster than a Snapchat message? There’s a lot of vendors out there, all fighting for their share of the business, measured Quarter to Quarter.  Vendors all live in the ‘now’.

“Of course everything would be the same even if we are acquired, which we are not” – Vendor to my client. They were acquired 60 days later.

“Who are you gonna believe, me or your own eyes?”- The Marx Brothers

Choice is admirable, but when there are too many vendors and too few Quarters for investors’ and bankers’ timeframes, it’s time for consolidation. Some will thrive, some will be acquired, and some will force their customers to exercise their Escrow clause. New vendors will take their standard toolkit (such as BI), and target their 2013 and 2104 revenue growth towards our vertical. A strong vertical, spending money on technology, a lot of it driven by new and emerging regulations – the perfect target for aggressive acquirers and activist investors looking for a high return.  The big cash-out may be perfect for founders and early stage investors, but customers often go through a potentially disruptive transition period.

INN’s online newsletter recently had a piece, regarding the state of M&A in Insurance software vendors (ISV’s), and while the author’s comments and info on a vendor being sold is correct, they best way to avoid any situation is avoiding it in the first place.  While the author cites some typical inputs on how to protect yourself if you find yourself in such a situation with a key vendor, for those of us who have been acquired, or been the buyer, the internal realities are worth knowing.  For example, shouldn’t you analyze, during your vendor selection process, if a potential vendor seems to fit into the ‘M&A candidate’ funnel? If the ‘40% of carriers are looking into or actively replacing their PAS’ statistic is true, knowing how to avoid buying into an acquisition-bait supplier is essential.

Here’s how we advise clients on identifying acquisition targets, adapted to your point of view. Incorporate these 7 tips as part of any strategic systems vendor selection process:

  1. Is your potential vendor focused on a niche, a single segment, and how mature is that niche?  Do they have the staying power to meet new technology and regulatory demands?
  2. Do they have superior technology, but cannot afford to go to market against the ‘big guns’, spending the same on marketing, sales, shows, etc?
  3. Do they have the financial muscle to develop a new regulatory-driven capability or report system in a compliant timeframe? If they’ve been too heavily modified for customers over the years, can they make all their clients compliant at the same time or will there be a waiting list?
  4. Vendors are often purchased for their talent.  Does this potential vendor have strong technical expertise, located where it can be nicely leveraged by an acquirer, as Yahoo has done recently?
  5. How will your deal affect their Enterprise Value and Valuation?  Do they suddenly become ‘affordable’ to an acquirer if they miss the Quarter? If their Valuation increases with your deal (due to money and credibility), do they suddenly look mighty tasty and yet affordable?
  6. If acquired, what happens to the Professional Services teams? Do they cash out or feel less vital and walk? What about the shared understandings you had with the now departed Regional Services Manager?
  7. It’s about risk management, like most insurance functions, and what is your IT risk profile? Are you willing to make a multi-year, multi-million dollar commitment to a vendor who could  be acquired within 18 months (so, about the time you go live)?

If your vendor is being bought, expect to be “delighted” by the acquirer’s statements of how rewarding it will be.  Take it for a grain of salt.  Figure out, did they buy your vendor for the user base, or to wipe out a competitor (and therefore your software is essentially dead)?  Many times, an acquisition is structured based on User retention – threaten them as required, but go to the CEO to do it – anyone below can be all too easily replaced during the organizational shakeout post-merger. Finally, be careful of that ‘special deal’, to be done by a specific drop-dead date to get incredibly special pricing.  I worked to unravel a situation where a company was being acquired for its user base, the sales people knew it, and cut whopping discounts for what they knew would be dead products.   The terms sounded wonderful while writing the check reflecting an 80%+ discount, but goodbye updates and support and hello aggressive cross-sell.

We all hear it will be OK since we’ll all live to our contracts, which is clearly the case.  But on a daily basis attitude and spirit of the relationship is what delivers.  You can negotiate  constantly updated code put in Escrow, returning fees if the Change of Control occurs before you go-live, ensuring update schedules are stipulated in detail, getting rid of the ‘then-current’ modifier in any description of fees for licensing and support, but if everyday life is one reoccurring renegotiation, like the scene from the Marx Brothers’ Night at the Opera (http://www.tcm.com/mediaroom/video/224507/Night-at-the-Opera-A-Movie-Clip-Party-of-the-First-Part.html), that 10+ year relationship with the vendor will be subject to entropy.  Even if you push for some form of equity upside when you do the deal, such as applying some amount of any license fees towards a buy-sell with stock options, since it’s not your primary business, is it worth the effort, versus a smooth implementation and support spanning 10 years?

There’s a lot of upsides to buying from a smaller vendor who genuinely wants your business, rather than being pleased to take your order.  Your ability to influence product direction, to know the CEO and founders, perhaps be on the Board, all have real value.  Smaller vendors rely on product excellence, rather than aggressive marketing, to win deals, so there’s a real benefit.  Just go into the relationship with your eyes open.

Richard Eichen is the Founder and Managing Principal of Return on Efficiency, LLC, 
http://www.growroe.com 
, focusing on companies, initiatives and products where technology is the primary means of delivery and revenue. He is one of their senior Turnaround, Transformation, Program Rescue and Process Rescue leaders.  As a Change Agent, Trusted Advisor, Program Leader and Interim Executive, Rich has over 25 years hands-on experience reshaping companies, Operations, IT/Systems Integration and strategic initiatives.  He can be reached at 
richard.eichen@growroe.com, and followed on Twitter, @RDEgrowroe.

Advertisements
Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: