Customer-centric Growth by Lincoln Murphy

Cloud Acquisitions Create New Opportunities

So you’ve built a killer SaaS product and [Google or Oracle or Microsoft or…] just bought your big competitor; is this good or bad for you?

NOTE: This post is originally from May 2010, but the last two years have been full of Legacy Software vendors snapping up SaaS and Cloud providers. From SAP buying SuccessFactors in 2011 to Microsoft buying Yammer and Oracle buying Taleo & Eloqua in 2012, things are going to continue to get interesting… but what does this mean for you? A lot… so read on.

Merger & Acquisition (M&A) activity around SaaS and Cloud seems to be heating up. Legacy Software, network and hardware infrastructure, and even Web 1.0 companies are are gobbling up SaaS pure-plays left and right these days.

For every buys Jigsaw (a SaaS company buying a Web 1.0-turned-2.0 company) or SuccessFactors buys CubeTree (SaaS buys Enterprise 2.0 firm) there are more deals where a legacy software company buys a SaaS / Cloud / Next Generation whatever company.

Some deals are small and fly under the radar, like EZFacility buys eFit Financial. Others are larger and really shake up an industry, like the announcement this week by Warehouse Management System (WMS) firm Red Prairie that they acquired SaaS WMS Smart Turn.

This uptick in M&A activity, which really started to heat up in 2009 at the tail end of the steep downturn when prices were low and SaaS companies that needed out wanted out, prompted Evangelos Simoudis from Trident Capital to write a great post detailing why now is a great time for M&A activity around SaaS.

It makes sense for him to really understand this aspect of the “SaaS Market” since his firm has a large portfolio of SaaS investments and it is in the best interest of his investors for many of those companies to find a big exit.

But what is the real motivation for these acquisitions from the buy side? For SaaS, Cloud, or Web companies, the acquisitions seem to be a head start to certain functionality more than anything else. could have built their own crowdsourced Rolodex, but instead used their massive cash reserves to just buy one in Jigsaw. SuccessFactors bought CubeTree to give it a head start in enterprise social networking likely as a hedge against SFDC’s Chatter.

So what is the motivation for Legacy Software companies to buy SaaS companies? Likely its not to add features since there is a technology disconnect. Is it the recurring revenue? Yes. Is it the existing customer base that they can cross-sell their existing (or future) products / services to? Yes. Is it the jump start on a path to SaaS? Yes. Is it the “SaaS DNA” that their organization might be lacking? Absolutely yes!

Evangelos in his post on M&A activity in SaaS thinks it will be mid to late 2011 before legacy companies really ramp their acquisitions of SaaS firms. We saw an uptick in activity starting in mid-2009 with some major legacy vendors brining us in to help vet SaaS companies for acquisition, but I think it was just the tip of the iceberg. As he states, the ramp will happen when vendors realize that doing it themselves is harder than just buying a company; and it will likely be due to their lack of “SaaS DNA.”

Whenever Sixteen Ventures is involved in due diligence or market intel work for a legacy company seeking to acquire a SaaS firm, a lot of effort is spent in understanding that “DNA” that makes up the target firm. Legacy companies still don’t “get” SaaS so they think by acquiring or “injecting” SaaS DNA into their firm, the entire organization will overnight become a “SaaS company.”

In theory that is nice, but in practice I’m not so sure. SaaS is often fundamentally different than the core business of a Legacy Software company. It just is. And while the “SaaS DNA” that they brought in could be beneficial, it is usually the acquiring company that is unwilling to change that causes the acquired DNA to whither away and die; the host is rejecting the transplanted material.

There are numerous examples where even a progressive web company like Google buys a company and the founders leave as soon as they are allowed to by contract and the product dies on the vine. While something companies don’t often admit to, there are times where acquisitions occur specifically to kill a threatening competitor and lock-down the executives in tight non-competes for a few years.

But this isn’t all doom and gloom! In fact, it is actually good news as it shows that every time a legacy company acquires a SaaS firm,  a new opportunity is born in that space. For instance, if you have a SaaS WMS solution,  you might have looked at Smart Turn being bought by Red Prairie as a death knell for your firm. A well funded market leader, possibly going IPO, just got acquired by a legacy market leader and now they’ll eat your lunch.

But there are other potential outcomes. First, if the company that acquires your competitor has their own Legacy Baggage (negative market sentiment, a distrust of their practices, over priced, etc.) that baggage will spill over nicely to their “new On-Demand product.”  Plus, the new company will likely cave to pressure to do one-off installs and customizations of their product since they don’t really understand SaaS, leading to the same negative market sentiment that befell the acquiring company.

In some cases, we recommend that firms start a new company from scratch or continue to operate the acquired company as a wholly owned subsidiary to keep from commingling the two. Trust is a HUGE factor in SaaS and many legacy software companies do not have the trust of their customers. The customers are happy to use their software if they get to run it themselves but would never want the vendor to run it for them. How can you take advantage of their newfound baggage?

Just as interesting is the serious likelihood that both companies have used negative marketing campaigns against each other or their delivery methods/business architectures (SaaS is insecure, legacy software is antiquated and broken) and now they are one. How do they position their products now? This can create an amazing amount of market confusion for another vendor to take advantage of.

Finally, there is always the possibility that the acquired company will die on the vine, never having a chance to really take off under the direction of their new owners. Perhaps the acquired company will linger in the purgatory that is a “hybrid” organization (both On-Premises and SaaS) while the executives, with strong non-competes in that space, wait out their prison sentence. This creates amazing market opportunities for savvy and strategic SaaS vendors.

Sixteen Ventures can help you perform market intelligence or due diligence on SaaS or Cloud acquisition targets, help you take full advantage of those strategic acquisitions and that new “SaaS DNA,” or help you exploit the opportunities created by the acquisition of your competitor. If you would like to discuss retaining our services, contact us to get started today.

If you’re an executive in an Enterprise Software or ISV company and you’re curious how we could accelerate your move to the cloud – including developing your Go-To-Market strategy – contact me and we’ll setup a time to discuss your options for making a profitable move to the Cloud.

(972) 200-9317

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