What do software companies look for in an acquisition?
Sooraj Shah asks whether there are any key themes or trends that software companies are looking for in acquisitions – if they’re looking at all.
When Sage lodged a £654m ($850m) bid to acquire the US enterprise accounting cloud developer Intacct, there were many raised eyebrows.
However, it fell in line with CEO Stephen Kelly’s mission to make Sage a “leaner, more global organisation” and it followed an acquisition trail within the financial year of HR developer Fairsail (now Sage People) and analytics company Compass.
Kelly told AccountingWEB that Intacct’s proposition complemented Sage’s offerings.
“Intacct had very successfully positioned itself as a cloud business, and it was this offer that attracted Sage as a business, having driven CAGR of 35% since 2014,” he said.
“The combination of Sage and Intacct’s existing product portfolio, brand, resources and partners, will put Sage in prime position to establish itself as the leading provider of cloud financial management solutions in North America in select segments,” he added.
The challenge for Sage is to manage and promote an overlapping product suite – but the question is, is Sage after cloud-based offerings and North American clientele with its next acquisition, and are other accounting software providers looking at the same types of companies to buy?
Kelly suggested that this is exactly what Sage would be looking for in the coming months and years. He pointed to customers moving to the cloud and away from “traditional monolithic ERP suites”, and said that culture, people, technology and IP will all be analysed to determine how a potential acquisition would benefit customers and their user experience.
Of the current technology trends, he says that AI, automation, cloud computing and software-as-a-service (SaaS) were all “increasingly important to optimising business and enterprise performances” and were therefore being “constantly observed”, adding that investments would be made when appropriate.
But it isn’t only the big accounting software companies that are on the acquisition trail.
inniAccounts, an online accountancy for contractors and consultants, is also on the lookout for acquisitions – as well as being approached about being acquired.
James Poyser, the company’s CEO, suggests that it has been an acquisition target because of its use of technology to deliver efficiency, consistency and accuracy, and to deliver a better customer experience.
When it comes to acquiring companies, Poyser is looking beyond specific accounting software providers.
“We’d look laterally and outside of the industry – because it’s cross-pollination that leads to innovation. In particular, the accountancy profession is far behind others in embracing the power of big data, AI and automation. If these concepts can be harnessed to create driverless cars, then producing accounts, returns and insightful management information should be easy and this is where we’re focusing our efforts,” he said.
And acquisitions are not the only way to be able to reap the rewards of another company’s offerings. Edward Berks, director of financial web and ecosystem at Xero, explained that his company’s growth has been “almost exclusively organic”.
“We find it more worthwhile to create collaborative partnerships with innovators in applications and services for SMEs and accounting, with a view to driving mutual growth,” he said.
Berks gave the examples of Xero’s integration with cash flow prediction and optimisation company Fluidly and partnerships with cloud payments platform Stripe and expense management automation provider Curve.
“We wouldn’t be able to celebrate our own accomplishments if it wasn’t for these collaborations. This is why we typically partner rather than acquire. Each and every partnership demonstrates just how effective cloud technology is in finding better ways to serve SME clients,” he stated.
And it is not unusual for many of these partnerships to turn into acquisitions as time goes on. Take Zuora, the subscription billing company that acquired its partner Leeyo Software, an automation revenue recognition company.
Leeyo had made the transition to the new ASC 606 accounting rules which go into effect next year in the US, and this was one of the main reasons Zuora decided to bid to purchase the company.
“Every company, regardless of revenue mix, product or service offerings will be impacted by these new accounting standards. We’ve partnered with Leeyo for over three years, and now we have joined forces to help our customers alleviate the burden of dealing with these new standards,” Tien Tzuo, CEO and co-founder of Zuora told AccountingWEB.
Companies with cloud computing seem to be a common trend among accounting software providers but there are other areas that they’re looking for too such as compliance with new rules, complementary products, and technology trends such as AI and big data. We may just be about to enter a period of increasing M&A activity within the area, as each company aims to get a competitive edge.