Within the IT industry, the swallowing of small companies by larger companies is a regular event. However, in the current economy we are likely to see increased frequency of acquisitions as the better positioned vendors scoop up financially weak competitors that have strong products. In these cases there is always a good chance of service continuity but we are also likely to see the total failure of some companies, and their disposal as a whole or through a sale of assets, which sees different business units being bought by different vendors or completely discarded. This is particularly painful as a customer when the vendor being swallowed is key to your IT strategy and your whole sourcing strategy has to be reviewed. In the worst case scenario, a vendor whose products you have just finished implementing after an exhaustive whole-of-organisation evaluation process is taken over by the supplier that rated most poorly in your assessment.
Vendor consolidation will keep happening and the likelihood that one of your key suppliers will be acquired is now so high that you must have plans in place to deal with it.
Firstly, it is vital to consider all acquisitions as takeovers – truly amicable mergers are rare – and the acquired company is most often the one that is most affected. If you are a customer of the company that is bought, dealing with the new owners of your strategic supplier requires extra diligence.
The acquirer may be trying to fill a strategic gap in its product line, or looking to break into a new market, or trying to achieve market dominance by reducing its competitors but the acquisition has business goals. And while they may claim that customer retention is high on the priority list, their product strategies may be totally at odds with your organisation’s strategic direction.
These events can put users in untenable positions, and wreak havoc with projects and investment decisions. But the good news is that there is much that can be done to protect your investments. Start with your account manager – they should really call you first, but too often they are more worried about their job security to call anyone but those at the top of their prospect list.
Read market analysis of the event because the more knowledge your team has about why and how an acquisition was made, the more ammunition they have to deal with the supplier and the better off they will be when deciding whether to stay with the new company or evaluate other options.
Evaluate the short-term impact in terms of product lines that are likely to be eliminated due to overlap issues. It’s not easy to get a supplier to commit to the future direction of products, but you should get written assurances from the vendor that product lines will (or will not) be eliminated because of the acquisition. The assurance should have a penalty based on a decreasing percentage of the purchase price during the product’s expected life cycle.
For any new product purchases the users are considering making with the new company, they should negotiate for discount levels that are equal to – or better than – the levels the incumbent supplier had been providing. Also, understand what exchange terms the new company is offering to replace customers’ existing equipment or software licenses with some of its own – sometimes very attractive deals are offered to switch.
Renegotiate service and support contracts because better deals are often possible as the new owner looks to lock in future revenue. This can be especially important for those that are using a product that may be facing rationalisation by the new company, but can also be used to advantage even if you are happy with the future directions - leverage the fact that the acquiring company’s competitors are likely to offer attractive trade-in deals during the period of confusion between announcement of the deal and its actual consummation. Tell the acquiring company that you are evaluating other options, and try for a better deal. Or, to protect the original investment, get a written extension to any maintenance contract that will extend the original effective date by five years.
Determine what is included in the product integration plans. The most critical impact of the acquisition will be how the current products are integrated into the new company’s product portfolio. Since this process will necessarily take a few months to achieve, users should get written assurances from their supplier that upgrades and needed software repairs will be provided on current applications during this period of integration.
Compare the new company’s long-term direction with your strategy. Will any forced migration to new technologies be affected by the limitations of the acquiring company? Will you be able to achieve your long-term goals with the new company? Even if the new company commits to maintain your current products, does it have the experience and skills to continue developing the product lines? Will the new company attempt to reposition a product which you are currently using and take it into a different direction that will affect the future use of the product?
If too many of these questions are returning negative answers, start to evaluate a move to a different vendor.
An acquisition of one of your main suppliers can be a nightmare, but it is possible to gain some control during what can be a hectic transition period. Be forceful and aggressive during the renegotiation process and always remember that it is your business that is at risk – not your vendor’s.
Chris Morris is director of services, IDC Asia-Pacific. Email comments to email@example.com
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