The spate of recent merger and acquisition activity in the software industry—the latest is Computer Associates' acquisition of Niku, a corporate governance software company I highlighted in a recent Intelligent Enterprise column "Defining Success and Failure, IT Style," Feb. 2005)—has been anointed with an air of inevitability that it doesn't necessarily deserve. While everyone talks industry consolidation as if it were a natural extension of Moore's Law, let me throw a little cold water on the current frenzy: M&A doesn't necessarily work well in the software industry. In fact, it fails miserably much more than anyone would like to admit. So watch out: whether end user or shareholder, that music you're hearing in the background is more likely to be a funeral dirge than a victory march.
The icewater I'm throwing isn't directed specifically at Computer Associates—CA has been singularly successful in building itself into an industry giant largely through acquisitions. In fact, the "CA Way" has historically been one of the only consistently successful models for software M&A: Buy it, gut it, sell it until the innovation runs out and then cash the maintenance checks until the customers find something new to buy. While early reports seem to indicate that CA may not be treating the Niku acquisition with the same severity—no one will be fired at Niku, according to Niku's soon-to-be former CEO—the ruthless CA Way has been a good model for what has historically been a bad way to grow a software company.
The history of software mergers and acquisitions plays like a Wagnerian opera—endless and bombastic, with only an occasional high note to cheer about. It seems like just about everyone has a horror story, and while many companies have survived bad acquisitions, others have begun their inevitable decline playing the M&A game. Think Baan (Aurum), ASK (Ingres) and Nortel (Clarify), to name just a few.
It's usually the same old story; it starts with poor due diligence and a lack of understanding of possible synergies, then come a few hidden product or technology problems that nobody could seem to see coming. Then the promised product merger that should have taken months starts looking like it will take years. Meanwhile, management spends all its energy playing investment banker and forgets to save a few cycles for products, innovation, marketing and sales execution. The final nail in the coffin comes when the big competitor's financials hit the street and it becomes obvious that someone else has been making that pile of money that was intended as a reward for the acquirer's M&A legerdemain.
The M&A-as-death-knell scenario isn't the only way a merger can go down the tubes. In fact, the more common way is for the acquired products to turn out to be either worth less than expected or simply worthless. PeopleSoft found this out when it bought Red Pepper, Sybase when it bought PowerSoft, Oracle when it bought DataLogix, IBM when it bought... I don't know even where to begin on that one. Suffice to say that M&A more often than not results in the acquired assets ending up in the junk pile, usually in shockingly short order.
So don't take heart when the M&A flag goes up—unless it's a cautionary flag. Look at Microsoft's Great Plains and Navision acquisitions, Siebel's acquisitions of Edocs, Motiva and Upshot, and Oracle's acquisition of PeopleSoft. Microsoft's enterprise software acquisitions have been bleeding red ink pretty much since the contracts were signed, and Siebel's acquisitions haven't contributed to any net new revenue growth. Oracle may end up being one of those exceptions to the rule, but the proof will have to come in the next few quarters. Only after some genuinely positive sales growth will it be fair to put up the green flag and call the PeopleSoft acquisition a success.
The bottom line is that the bottom line isn't necessarily served by lots of M&A. And that means customers suffer as their products become orphaned and their well-planned technology roadmaps turn into spaghetti. Because behind every failed acquisition is a failure to serve customers well. And that failure is the most egregious M&A problem of all.
Joshua Greenbaum is a principal at Enterprise Applications Consulting and has been covering the software industry for more than 20 years. Write to him at [email protected].