We have all heard the expression, “Grow fast or die slow.”
There’s a myth in the software industry that only large, well-funded companies have the capacity to grow through acquisitions. This perception often discourages medium-sized software companies from exploring the transformative power of mergers and acquisitions (M&A) as a growth strategy. However, this myth is far from the truth. In this Agile Thinking® insight, presented by Cube Capital, we aim to debunk this misconception and shed light on how medium-sized software companies can, and indeed do, use acquisitions as a strategic lever to accelerate their growth and evolve into large enterprises.
Many medium-sized firms have successfully used a deliberate and organised approach to M&A to fuel their growth, diversify their offerings, and enhance their market position. These companies have proven that with the right strategy and guidance, acquisitions can be a powerful tool for growth, regardless of the company’s size.
Another common misconception among founders and shareholders of medium-sized software companies is the belief that they need large reserves of funds to pursue acquisitions. This myth often stems from the assumption that all acquisitions require substantial upfront cash payments. However, this is only sometimes the case. In fact, many acquisitions are structured as mergers, where acquiring companies use their own shares as a form of currency to finance the deal.In such transactions, the acquisition target company’s shareholders receive shares of the acquiring company instead of cash. This allows the acquiring company to preserve its cash reserves and aligns the interests of the shareholders of both companies, as they all become stakeholders in the combined entity.
Moreover, the notion that medium-sized software companies cannot raise capital for acquisitions is also a myth. When the target companies are attractive, and the potential for growth and value creation is evident, investors are often willing to provide the necessary capital. This can be in the form of equity financing, where investors provide capital in exchange for shares in the company, or debt financing, where funds are borrowed from financial institutions to be repaid over time.Medium-sized software companies with a clear growth strategy and a strong management team can attract investment and secure acquisition financing.
Organic Growth
What isn’t a myth isthat organic growth has its limitations. Cube Capital’s research reveals that software companies’ average annual revenue growth rate has decelerated to 10%. While this may seem substantial, it often needs to catch up to the ambitious growth targets set by these companies.
Economies of Scale and Cost Efficiencies
M&A can offer significant cost efficiencies and economies of scale for medium-sized software companies. By merging operations, sharing resources, and eliminating redundant functions, companies can streamline their processes, reduce overhead costs, and boost profitability. In fact, cost synergies are frequently cited by software company executives as a primary motivator for engaging in M&A transactions.
By strategically acquiring other companies, software firms can penetrate new markets, diversify their product offerings, enhance their technological capabilities, and secure a competitive edge.
M&A allows these companies to venture into new geographies or verticals, capitalising on the acquired firm’s established market presence and customer base. This strategy facilitates rapid market penetration and revenue generation, reducing the time and resources needed to build a customer base from the ground up. Over 40% of software companies consider market expansion the primary driver for M&A engagement.
Diversification and Product Portfolio Expansion
Software companies often struggle with the risk of overdependence on a single product, service, or market. This risk can be mitigated through strategic acquisitions that enable diversification of the product portfolio. By acquiring companies with complementary technologies or innovative solutions, software firms can broaden their offerings, respond to emerging market trends, and tap into additional revenue streams. This strategy reduces reliance on a single product and fosters customer loyalty.
Two substantial advantages of making acquisitions are bringing teams of people to the company and entire portfolios of clients with recurring revenue streams and giving access to the acquiring company to leverage sales of their products to these clients.
Real-World Examples
Several software companies have successfully leveraged M&A to fuel their growth. A few well-known examples, including two Australian companies, are:
- Slack: 8 acquisitions since its inception in 2009 before Salesforce acquired it.
- Zoom: 9 acquisitions since its founding in 2011.
- Canva: 7 acquisitions since its launch in 2013.
- Atlassian: 18 acquisitions since its founding in 2002.
These examples underscore the tangible benefits that software companies, regardless of size, can achieve through well-executed M&A transactions.
Conclusion
M&A is a powerful tool for unlocking growth and maximising value. It allows software companies to access new markets, diversify their product portfolios, acquire innovative technologies, attract top talent, and achieve cost efficiencies.
M&A is not a strategy reserved for industry titans. Medium-sized software companies can also reap significant benefits from strategic acquisitions, paving the way for accelerated growth and enhanced value creation.
However, navigating the complex M&A landscape requires partnering with experienced advisors with deep industry knowledge and expertise. Cube Capital, an M&A advisory firm based in Australia, is well-positioned to guide software companies through this process. Services cover the full spectrum of identifying acquisition targets, conducting valuations, formulating bids, negotiating win-win deals and post-acquisition integration planning. We are committed to helping medium-sized software companies realise their growth potential through strategic acquisitions.
In an ever-evolving software industry, it is prudent and essential for every software company, regardless of size, to actively consider acquisitions as a key growth channel alongside organic growth.