The appetite for mergers in the SaaS business is hot, with dealmaking volumes predicted to grow at 13% in 2024. Yet between 70% and 90% of M&A transactions fail to meet their objectives.
Despite the risk and uncertainty, there lies a roadmap for success—one that hinges on understanding the human factor, aligning sales and marketing strategies, and planning and prioritising post-merger integration.
This article is aimed at CXOs, founders, and sales and marketing leaders who are either acquiring a new company or being divested and preparing their company for a new future or are post-merger and struggling to achieve revenue and market growth projections.
If you fall into either of these categories, you may have fallen victim to the "1+1=3 synergy story" that deal-makers “sold” and investors and new owners “bought” when they acquired your company. Or you may be a partner in an inconvenient marriage forced upon you by investors for survival.
In 2021, the COVID-19 pandemic drove a peak in merger and acquisition (M&A) activity.
However, in 2022, the SaaS (Software as a Service) bubble burst, marking the end of the era of growth-at-all-costs SaaS. This caused SaaS company valuations to plummet, and fundraising suddenly became a life-or-death issue for many companies.
This resulted in many hastily arranged marriages within prominent VC and PE portfolios and seemingly synergistic companies forced into shotgun weddings. This trend is ongoing in a tight funding market.
Despite previous speculation about the "death of SaaS," the industry continues to grow and offers great potential for both established and emerging companies with sustainable business models. This growth is driven by several significant trends, including the integration of artificial intelligence (AI) and robotics.
According to a recent PwC article, the software sector continues to dominate technology dealmaking activity due to investor appeal of more predictable recurring revenues and cash flows. Over 5,000 software deals were recorded in the first half of 2023 alone, and the sector is predicted to remain a hot spot through 2024.
While dealmaking volumes are below the COVID-19 2021 peak, they are predicted to grow at 13% in 2024, according to EY
Despite promises of synergy, mergers and acquisitions often fail to meet sales and marketing leader’s projected revenue and market growth. A commonly cited statistic by the Harvard Business Review indicates that M&A has a failure rate of between 70% and 90%. M&A expert Yaakov Weber reinforces this in his book, A Comprehensive Guide to Mergers and Acquisitions, stating that 83% of M&A activity fails to achieve the merger's goals.
While this failure rate might seem discouraging, the fundamentals of the SaaS business model are sound, and the allure of accessing new markets, expanding market share, and fostering growth continues to attract investors and drive the upward trajectory of M&A activity.
However, beneath the bravado of deal-promoter post-merger growth projections lies a myriad of risks, including losing:
Moreover, integrating disparate sales and marketing entities and their distribution channels is daunting.
According to Weber, the departure of key engineering personnel, particularly in hi-tech companies, significantly undermines the potential success of mergers and acquisitions.
These individuals' knowledge and innovative capacity drive research and development efforts. Consequently, if these critical employees exit the acquired company, the acquiring entity is deprived of much-anticipated value.
Addressing cultural disparities and their implications is paramount before and after the deal is completed.
Researchers and experts stress the significance of human factors in determining M&A outcomes. Listening better to employees and acting faster on sentiment after the merger announcement can alleviate expensive de-mergers when employees strongly voice their disapproval and foresee disruptive culture-fit problems post-merger.
Pre-merger strategies should fully consider these factors to drive better long-term results.
One of the primary challenges post-merger is aligning product, marketing, and sales teams to effectively and consistently promote cross-selling of new products.
Despite extensive product training and incentivisation, merged sales teams frequently fail to achieve post-merger revenue expectations.
Upon closer examination, four key factors emerge as significant contributors to this shortfall:
To overcome these hurdles, programs must prioritise clarifying the value proposition of combined offerings and fostering competency development through immersive skill-building workshops.
Post-training reinforcement, manager coaching, and certification initiatives are required to reinforce behaviour change, essential for achieving sales team integration and revenue targets.
M&A in the software business is hot; however, deals in the technology industry are fraught with challenges and risks, with a high failure rate of between 70% and 90%.
In merger candidates, sales, marketing, and product leaders must develop a comprehensive strategy for aligning and enabling their teams.
To tackle the challenges ahead, CXOs, founders, and sales/marketing executives should conduct thorough research, establish effective communication channels, listen to and act on employee sentiment, prioritise employee engagement and retention, and focus on cultivating a positive company culture.
Working on these will improve your chances of successfully moving into revenue growth and avoiding the post-merger chasm.