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Why M&A’s in Tech Often Fail

Why M&A’s in Tech Often Fail

George Brooks
minute read

Merging companies is hard.  It’s a challenge for culture, brand, and technology. But it can be successful if you’re prepared.

Someone on my leadership team recently asked me, “Does it seem like M&A has picked up a LOT recently?“ A 2022 Deloitte study confirms that “92% of respondents expect deal volume to increase or stay the same over the next 12 months.”

Sure it’s happening in the creative and technology service space, but also in financial, tech companies, manufacturing, and logistics. There seems to be a big upswing in companies selling and companies buying.

The expectation of what an M&A will be like

In an ideal world, an M&A transaction is a win-win-win situation.  The founders and/or investors have worked hard to grow a brand, product, or service.  They’ve spent long days, nights, and weekends creating enough value that payday is here!  Finally, they can retire early and sail off on their yacht into the sunset, while handing their baby over to new parents that will love and care for their company as well as they did.

Then there’s the purchasing company that couldn’t be more excited about the new addition to their workforce. Each employee will fit perfectly into the org structure already in place.  The IP and technology will seamlessly integrate into the existing product suite, and the company's profit and value will quadruple overnight.

And this is how most M&A transactions go, right? Well, not quite.

Commonly overlooked elements that make M&A hard

Important monetary factors like financials, tax advantages, or valuations are obviously the driving factors for whether a company decides to buy or sell. However, there are a few crucial elements that directly influence the likelihood of success that are commonly overlooked:

  • The humans involved
  • The tooling & tech

If you don’t complete the due diligence of considering all of the variables beforehand, you can’t be sure whether the deal may be lacking. When teams focus solely on the peak product offering and the basic metrics (staff head-count or MRR/ARR and/or P&L), there is a lot missed. Both parties can end up shocked at the challenge of bringing two separate groups and their solutions together.

It’s like the television series “Auction Hunters” - people agree to buy storage units sight unseen. When they open the unit they may find millions of dollars of valuables, or they may just inherit someone’s old gym clothes.

Two people talking with their laptops open in an office setting.

What could happen after an M&A transaction?

This has been my experience at Crema working with companies that were either a) on their way to a sale or merger or b) needing help navigating the journey after the purchase.

Scenario 1 - The mass exodus

The clashing of two different cultures, unclear expectations, unmatched benefits, and/or the major shift in product direction are all causes for the acquired group to experience massive turnover in staff. Sometimes literally 100% (meaning that every person on the original staff was either let go or decided to leave on their own).

In these cases, the founding team or equity holders now have lost their team and vibes are…. not great. They often take a lesser buy-out to leave early before their 2-year term. Imagine you bought a tech company because you wanted their team knowledge and their tech solutions. All of that knowledge just walked out the door.

Scenario 2 - When the tech doesn’t mix

Remember being a kid in art class mixing paint colors? Red and yellow make a beautiful orange. But if you try orange and green you get an ugly brown.  Blending one separate piece of tech with the current company product might not go as intended.

Say that the acquisition goes through but the tech didn’t mesh. In order to reduce the overall cost, they let go of the majority of the team that wasn’t a part of the tech group. They keep leadership and some key developers to attempt to transform the tech to fit their existing solutions.

We now own 3, 4, even 5 products that look different. But really they’re all built on slightly different tech stacks, store data in different ways, and don’t allow for a seamless experience. Each team that represents these products has lost steam because they were hoping to continue refining and improving their product, now they’re just stuck tearing the tool apart to “play well” with others.

Scenario 3 - First-time tech ownership

The acquiring company uses software to run its operations, sales, etc. But in order to move forward and stay relevant, they know that they need to have their own tech IP.  So instead of building it from the ground up, they find a company willing to sell.

Here’s the challenge.  The tech company is now being forced into the mold of a more traditional structure and culture. The assumption was that we would buy the tech and then have a tool - simple! Similar to signing up for a SAAS product, except now we own and control it. Right?

However, the reality hits quickly when a massive shift in managing teams takes place.  Agile backlogs, user stories, and bugs are now jargon getting tossed around by staff.  The app’s UI is feeling outdated.  It needs tech debt clean-up that they didn’t find during due diligence.  They want to add features but they don’t have the team and experience to organize this work.

A table of people discussing mergers and acquisitions on a bright morning.

How to merge teams after M&A

There are many elements in play that determine how an M&A goes, including roles, compensation, location, existing experiences, or lack of experience.  It’s an extremely complex matter to navigate.

Growing any team is difficult!  That’s why Crema has intentionally grown slowly.  Hand-picking each person to join our product teams, one at a time.  We know the consequences of ending up with an off-balance or incorrectly structured team.  

When a start-up is rapidly scaling, they might struggle with this, because they’re hiring very, very fast. But after some time they refine their onboarding, training, and supporting approaches that make the hiring process more sustainable. These recommendations will help faster team building go smoother.

Take inventory

When you merge multiple, potentially large teams into one organization (I would consider anything over 10-20 people on a product team as “large” - they will deal with more complexity), you need to take the time to quickly take inventory of everyone in play.

Start with a list of people, their roles, their compensation, and their tenure.  Then take it a step further by gathering feedback from every person.

  • What are they motivated by?
  • What is their forte? The thing that they are most confident in.
  • What was the hope for the product or service they were supporting before the merge?

Built trust

More often than not, the two teams see this massive change as a threat.  These are some of the fears and anxieties you should be aware of that the team might be feeling.

  • My job is at risk
  • The culture I love is at risk
  • The product is at risk
  • No one knows what I know or don’t know

Find ways to pair up team members across both organizations.  Use pair programming, pair designing, or allow people to sit in on meetings from either team.  Cross-pollination will allow people to start to have more empathy for the organization they are being placed next to.

Give people support

Make sure that people are supported! It can be by a director, leader, manager, etc. One of the biggest risks is silos and bottlenecks during a time of change. When people feel that they’re idle, isolated, or don’t have a clear context, they will try to make meaning of things even if it's not accurate.  False narratives lead to fear-based decisions and the innovation you hoped to see when the two teams come together is squashed.

A board room with a team of men and women discussing digital product work.

How to handle the tech after an M&A

Building one product well is hard.  Building two products well is even harder.  Combining two existing products successfully without a total rebuild is going to take one heck of a team.  Here are some things to consider when you’re looking to combine products.

A unified design system

If the plan is not to keep the two products separate, but rather bring all users under a single roof, you will need to have a design system. As features of the app get migrated into the product suite, it will be crucial to create a unified product experience.  It’s extremely obvious to the user when two apps have just been linked together.

A unified front-end can be updated by reconfiguring the CSS/styling. Or it may require rethinking the front-end application layer of your app. In many cases, it’s simpler to go ahead and create a new front-end application that brings the two app experiences together.  Behind the scenes, you can call data from multiple places, depending on how well things are structured.  (If you don’t have the ability to do this, our team can help.)

Data migration or mapping

As you start to unify experiences, it’s key that you understand what data is in play.

  • Users and permissions
  • Microservices
  • API’s
  • Rogue tables of data (that no one knows why it was originally created)

A data audit is an important route for you to understand where data is coming from, where it's located, and how it's structured. Well-built tools will probably follow best practices, but often data can get messy as the product grows.  Mapping, migrating, and merging data can be a heavy lift.

DevOps and SecOps

Mergers can be DevOps and SecOps nightmares because no one is completely sure who has access to what.  Where data is stored? Is storage managed securely? Often each company has a DevOps SecOps team.  Be sure to pull them together to share what data is in play.  A simple review of NIST (National Institute of Standards and Technology) or cloud security best practices is a good place to start.

Two men talking through evident technical issues on a rooftop lounge.

How M&A can be a sweeping success

Great digital products are built by great teams.  Depending on the team and organization, a merger can truly be a huge success.  The most important thing to remember is that it takes time, patience, and a lot of curiosity.

The most successful stories tend to be when there’s a long transition and the company being acquired is able to maintain a relatively independent brand. While the logistics, integrations, and teams are married in a way that one might smoothly absorb the other.

Like when a company is just starting and looking for product-market fit.  A newly merged team must establish a shared sense of purpose.  This requires time to take inventory, establish priorities, and dream about the possibilities of what these two organizations can do together.

Before you buy or sell

If you’re interested in selling your company or buying another, make sure you set realistic expectations for what will be required to make it a success.  Take inventory of all that’s in play, and understand that out of the gate most people will resist this change, and see it as a possible threat. Once there is a shared purpose and trust is established, the teams can start to look carefully at how retooling, reorganization, and full integration can start to take place.

As technology solutions are considered being brought together, be sure to think about creating a unified product UX.  Be sure to plan careful user or data migration and management, security, and API’s.  Don’t be surprised if significant aspects of the product need to be restructured, rebuilt, or cut out altogether in order to better serve the future vision.  M&A can be a win-win-win with the right plan, the right team, and the right timing.

My team is great at helping leaders take prudent inventory of their team and product to be able to create a unified experience. We’re here to prime the road ahead for your scaling business. Get in touch.

Last updated
Nov 7, 2022

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