Suresh Menon: Dancing with Elephants

Attention from a big corporation can often feel like dancing with an elephant, it’s fun but you could get squashed!

Suresh explains how mature businesses approach acquisitions as part of a growth strategy, usually as an alternative to building capability in-house. He discusses how an acquirer evaluates their options and approach a deal. Most important, talks about making an acquisition work in the long term – for the acquirer and acquired team.

This talk is useful if you’re considering partnering or pursuing an acquisition, as a buyer or seller. You’ll get a clear understanding of the challenges of making an acquisition work from both sides of the table. How do you make an informed decision, work through the process and beyond? He also shares some of the red flags buyers and sellers need to pay attention to that will inevitably end with someone being squashed.

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Transcript

I’m Suresh Menon. I run a the software business at Zebra Technologies.

Zebra Technologies and My Experience

For those of you are not familiar with Zebra, it’s a very large hardware, very pretty diversified hardware and software business. Everything from mobile computers to the stuff they started off 50 years ago with, which is barcode printing, hence the name Zebra, and then subsequently scanning, robotics, machine vision.

And then sometime along the way, they decided, hey, we really like the high margins and high growth that software or SaaS businesses have, so let’s get into that business. They got into that about four years ago, and just like the topic today, a lot of how they got to building enough of foundation for software was to go out and do a lot of acquisitions, around a billion dollars worth of acquisitions. And there’s not to say that large companies do not actually have organic bills as well. So there were parts of the portfolio that came in through that as well.

I joined them about three years ago in order to run that software business and take it take it forward. A lot of people had a lot of cautionary examples to me saying software never succeeds in the hardware business, primarily because what makes you good at hardware makes you really bad at software, and vice versa. And I had to do a lot of teaching tour or speaking tour with a lot of the leaders across the different functions at Zebra, just to make them understand how different software is.

And the easiest analogy when you’re talking to leaders in finance, when you’re talking to leaders in legal, in IT, you have to, you have to simplify it and bring it down to a level that they could understand, not being, let’s say, practitioners of software. And what I what I basically did is I said, think of the uncertainty in software, which you don’t have in hardware. Because what successful large hardware companies, what they do is they squeeze absolutely every bit of risk out of the hardware program, because these are long running, long running programs.

Hardware Team vs Software Team

The Situation: So what I said is, I said, imagine that there’s a hardware team sitting in San Francisco and there is a software team sitting in San Francisco, both are given the same mission.

One is told that you have to reach the East Coast. That is the mission for you guys, and the other team is also told, you know, the exactly the same, the same thing. How do you think the two teams would go about figuring out how to, how to get there?

• Being in software, I can tell you exactly what they would do, right? What they would do is they go into a conference room, start whiteboarding, and say, Okay, it’s, you know, we have first and most important thing is we’ve got to head east, right from San Francisco. And what they do is they give themselves a first milestone – cross the Sierras and get to Reno right? That’s about a three hour drive. That’s what they would end up doing. And they would say, once we get there, figure out what we you know, what we learned, right? What worked, what didn’t work, regroup there and then decide what is the next iteration, and the next iteration. That, you know, people call it agile development. People call it, you know, understanding product, market fit and so on.

• But the hardware with team, on the other hand, would sit there for the next eight months in that conference room. And what they would do is they would very accurately plan out every single stop along the way, make sure that you know they’re understanding what the weather is going to be, what the season’s impact is going to be, and then figure out with a great degree of precision where they’re going to land in Virginia Beach, this latitude and longitude, right?

And by going through a lot of these details and applying it to how processes work inside of large hardware companies, we were able to convince a lot of them that there’s a there’s a degree of uncertainty that you have to live with with software. You’re not going to have a one year roadmap where every day, everyone is marching absolutely in lockstep to getting to that. In fact, if we ran a software business like that, none of us, you know, I mean, none of us would succeed.

So that was, you know, goal number one, and we’ve managed to build a successful software business. And coming back to the topic for today, have been able to go out and acquire more businesses and successfully integrate them into into Zebra.

Prior to Zebra, I used to be at a company called Informatica, was there for about 10 years. And prior to that, you know, a variety of organizations ranging from a small 60 person startup all the way to probably one of the biggest elephants at that time, which was 120,000 person company called Nokia. And, you know, everything, everything in between.

I live in, probably what’s the largest echo chamber in the world, Silicon Valley, you know, where a lot of these, these ideas are formed but of course, you know, then get amplified as well.

Dancing with Elephants

So when Mark and I were talking about, you know, what it is that, you know, we could be, we could be discussing today, you know, it’s very important to think about as a lot of you are probably, you know, sitting in two sides today, right?

One is, you’re building businesses and executing on trying to make them grow and escape.

And there’s probably some of you in the room who are a part of these, you know, these elephants, you know, small, medium, large elephants, it doesn’t matter. But you’re part of those elephants, and you’re looking to see, how can you drive incremental growth, fill gaps in your portfolio, and looking to do acquisitions. And these acquisitions are pretty quite important, right? Because, as this is a decision that most companies are dealing with on a daily basis.

Should we start getting into new markets with our own organic build products? Should we fill gaps in our portfolio by building versus buying? But before I even get in there, and maybe the the road trip analogy that I had before might also apply here is take a step back and say..

Book Recommendation: The Innovator’s Dilemma by Clayton Christensen

How many of you have read Clayton Christensen’s book, The Innovator’s Dilemma? Great, so that’s half the room. For those of you haven’t read it, would suggest picking up a copy and reading it at some point.

But the gist of the book is really about how well run companies, or even large, large companies, you know, find it very hard to innovate, and the reason for that is, the larger you are, the less you know the less tolerance you have for risk, right? So if you want to try and say, I go back to the 60% startup that I was part of, when we decided, when we heard from customers, that there was a certain opportunity to build something, an application around some of the core SDKs that we had, nobody was asking the questions, executive leaders asking, how are we going to monetize that? What are you going to price it at? Even before you started figuring out what the what the solution is. So what happens is great ideas tend to die in these large elephants as they go up the chain, right?

The further up you go, there’s more stripping out of risk.

And then in the end, when you get to the top, what you find is a decision that basically says it’s not worth it, because there’s so many questions to answer, and we’re not going to go out and do it.

Let’s assume now that you do have, you made it, the ideas made it all the way to the top. There still is very little risk, but there’s also a lot of opportunity that everyone recognizes. Then it comes to what is not in the book, which is something that I heard about 14 years ago, which was the addiction to acquisition that these large companies have. And it’s not an addiction that is something that they built up over the years themselves, but it basically comes down to the fact thatincreasing your OPEX budget for the next year. Meaning I’m running at maybe a $1 million budget this year and next year, I want to get just an incremental 200k or 300k is extremely hard to get. On the other hand, taking a bunch of cash that’s sitting in the company and saying I’m going to go out and buy and may and do an acquisition seems to be the easiest path forward, right?

So this is the reason why so many large companies are addicted to acquisition. Each year, there’s north of $2 trillion worth of M&A that is happening just in in our space alone. And the reason for that, again, is being able the choice between OPEX versus cash is pretty straightforward for most of most of these, these companies.

Given example, there is a financial technology and data services company that went out and spent about $800 million buying a bunch of software assets and data assets, and now, as they look to planning for next year, all they’re asking for is an incremental $5 million in budget, because there’s this really nice adjacent space that they want to go out and address. They’ve got most of the building blocks, they just need to build a few extra things that’s outside of their run rate.

And the answer, what do you think the answer was? Yeah, exactly. The answer was, No. So, what is the most likely part? I don’t want to speak for them. What is the most likely part for them going forward? The most likely part for them to go forward is go and find a target who’s already been in the market two to three years or more, and spend a couple of 100 million dollars and acquire their business. That’s the reason why there’s so much acquisition going on.

There are some other valid reasons as well. If you were running one of these businesses, and you had the opportunity to say, I need to get into this particular space, I can spend, let’s say, 5 million over three years. Five million. So that’s about $15 million I need to invest in there in about three years time. We know we will have a product that is able to compete, and we’re going to go and start actually gaining market share in that particular segment, versus now spending $100 million in cash right now and acquiring a company that’s already three, four years into that journey, you have eliminated risk.

You’re doing the right thing for your company, which is, you’re now acquiring a business that has already proven product market fit, has referenceable customers. And can you can now bring the power of your larger organization, whatever that scale may be, go to market the number of salespeople that you have that you can now take this acquired technology or portfolio and start going out to market in a much, much more exponential, exponentially large reach than you would have had otherwise.

Risk in Acquisitions

So there’s, there’s quite a bit of, you know, risk in these, in these acquisitions, and we’ll talk more about that.

I said this $3 trillion worth of M&A that’s occurring every year, but what do you think is a success rate of these acquisitions? Any guesses? What is the success rate across the board? Someone said 10% and that’s 70 to 90% of these acquisitions fail. So that’s $2 trillion, 70-90% fail.

And we talk, we go into reasons as to why they fail, but that doesn’t put off anyone, because everyone believes that they’ll they belong to the minority. And we talk about some of the factors, some of it start all the way in the beginning, which is, do you have the right rationale to go out and acquire this business? Is this target that you’re intending to acquire part of your overall strategy. And it’s something that you understand what you’re getting by going out and buying this. There are so many other factors we get into cultural, faith, integration issues and so on. But this is going to continuously happen. And if you’re looking at an exit that involves selling your business to one of these elephants, it’s important to understand what drives them to go out and do this.

Why do large companies acquire others?

Reason #1: Platform Play

I think I’ll talk about various examples, but one of the most complicated ones and the most rare ones is probably where I’ll start with, the Platform Play.

And what I mean by the platform play is, this is an example I could take. You know where, when I was at Informatica, we had point solutions in a variety of different spaces. You started seeing customers saying, I need to now use these different modules or different capabilities that spanned multiple markets, even as defined by Gartner, but I need to start using them in conjunction with each other. So that really means is that you need to start building up a software platform that starts tying all of these point solutions together and then gives customers the ability to say, I’m going to start if I’ve invested in solution number one, which is part of your portfolio. My friction to adopt solution two, three and four progressively, progressively go down. It’s not easy building a platform. It’s even harder to fund a platform when you know it’s just as hard to fund a completely different product.

But now imagine going to your CFO, a CEO, and saying, I need to build a platform, and I need X millions of dollars, and I’m going to go and take the next three to four years to build it. You can no longer answer the questions as to, how are we going to monetize this? Is there going to be a price for this platform? And the answer is we don’t know the answer to the first one, and the second one is, no, we’re not going to be charging anyone for the platform. So this is one area where as you look at if you’ve got capabilities that start tying together these spaces.

And very often, what happens is these platform plays eventually end up redefining what the actual market definition is. It starts coalescing different point solutions into a larger play. It happens very rarely. This is something that I have done just twice in my career.

What happens far more often is the competitive gap.

You’ve got sales coming in and saying we’re losing against competitor X and competitor Y because we don’t have this feature, we don’t have this modular, sometimes we don’t even have this product that’s part of our portfolio. And this then drives the priority within the organization, saying we’ve got to do something quick, and quick typically implies, let’s go and buy a company that fills that particular competitive gap. This happens extremely often.

We’ve done this many, many, many, many times. And some of the examples I have is, as we’ve gone in again, this is an example I take from Informatica, going and competing against companies like SAP. They’re very they’ve got bits and pieces of capability all across their portfolio. They look for competitive weakness in one of their competitors, like us back then, and start pushing one of those capabilities, saying, hey, but you’re going to go and do a pilot or a POC with some of our competition. Make sure let’s try and tailor the use cases that you want to actually use this competitive piece upfront.

So that drives everybody else to go out and react and typically that becomes a quick reaction in terms of going out there and seeing who’s available. We’ve in the past, done acquisitions to close competitive gaps ranging from small 13 customer sub ten million acquisitions all the way to $100 and $50 million revenue companies that are public, and have acquired them as well in order to fill the competitive gap. So this is one of the most common scenarios.

Reason #2: To Drive Growth

Sometimes there are parts of the poor parts of the market when as a company, you look across the portfolio and look at the evolution of certain parts of the the market and say, here is an opportunity for us to go out and fulfill a need, and that is going to drive a lot of growth for us. And this pretty much applies to a lot of, I think, probably the second most common style of acquisitions. Acquisitions that I’ve seen in the past where you go and acquire a very compelling technology or a product that is in that particular space, and we go, and that then comes in, typically smaller companies, and you see exponential revenue growth because you’ve got a startup with about six to eight sales people who are going out there and selling this, you now acquire that business as is, don’t do anything to the product, even for the first year, but now put it in the hands of 600 plus quota carrying sales people around the world. And then you see year one, year two, revenue targets being blown out of the park because of the fact that you’ve got so many people now going out there and selling it.

This is extremely common. This is what a lot of large companies are doing these days in order to derive these. Now, again, I am making the distinction that these are compelling products, right? And the diligence is that if we put this in the hands, it’s going to be frictionless, almost frictionless, to put it in the hands of our sales team, and with our go to market reach and our marketing reach, we’re actually going to be able to generate a lot of revenue for this particular product.

Reason #3: Vertical Integration

Not sure how many of you here OEM your technologies to other companies, because that’s one of the most logical places where a lot of acquisition strategy is defined.

And I can give an example of over here. I think we got Bill sitting in the background back there. I give another example of a company called Address Doctor, OEMing successfully due to his efforts to a lot of us, our competitors as well. And then what you start seeing is the competitive race, because everyone wants to own, nobody wants to be left behind, because you’ve got a key piece of technology that you are embedding as part of your software portfolio. And there is always a threat that if your competitors acquire it, who are also OEMing it, if they acquire it, then you lose that very, very critical piece of OEM capability. And that’s when the bidding wars begin. I think that’s probably one of the most attractive places to be in.

There’s so many other examples I can give you. We’ve had something that was very key Push to Talk capabilities on mobile devices. Which is something that we at Zebra looked at and OEM, again, has applicability, as you can imagine, all the way from public safety to healthcare to retail. And the sooner you own that asset, the better. Because it could go away to to somebody else who decides they don’t want to be in that business anymore.

So that’s the the fourth piece that that is that is pretty key for us. I did want to make this quite interactive, any questions, any comments, because I didn’t want us to wait until the end of the session. Any questions on. Yeah? Go ahead.

Audience Member 

So I’m in an industry where sometimes you see acquisitions happen to actually kill innovation.

Suresh Menon 

Yes.

Audience Member 

How often do you see that happen?

Suresh Menon 

So that’s one example. So I’m not sure if everyone heard the question, How often do companies acquire smaller companies just in order to kill the competition, kill innovation, so that they don’t get get disrupted? Happens quite often. You know, trying to take out a customer where and but this typically happens I’ve got a caveat that.

I very rarely see public companies do it. I do see private equity owned firms doing that quite often. There is another example, since you brought up. There’s another example of of acquisition that is not anywhere on this on the slide, and that is the the market consolidation, or play, which is really about I’m an elephant, and I’m going to go out and buy another very mature business because they have customers that I need, or they have revenue that I need.

9 out of 10 times those acquisitions fail, and the ones who are always suffering in the end are the ones who were the customers of that acquired business. But I didn’t include that as part of the thesis, because I didn’t, I think it’s, it’s all about elephants buying smaller companies.

Any other, any other questions on what? Yes, please.

Audience Member 

You said that 9 out of 10 acquisitions fail. Yes. I wonder what your definition of failure, success is, and for who?

Suresh Menon 

So, typically when I say fail, I’m again putting it this in the lens of the acquired business. Every acquisition done by any of these organizations will have a business case or a thesis behind it. They’ll come up with a lot of justification, sometimes taking it up to their to the even sometimes to their boards or to the public, to their investors, and say, we’re going to be acquiring company X, because it’s going to do these things, right? We’re going to be, it’s going to be revenue. The revenue is going to be accretive to us, or neutral to us. It’s going to be driving X amount of increased revenue and and so on.

And the reality is, when I say, did it fail? It failed because it did not meet the thesis. And it did not meet the thesis in the time frame that the thesis was said to be. So a lot of those metrics could be three year horizon. We’re going to be taking this company from here, this acquisition from here to here. It did not happen in three years. Maybe it happened in five years. Would you still call that a failure? I think so, right? Because it did not meet the the original business case.

But that’s a best case scenario that we just pushed the achievement of the case out by two years. There’s quite often extremely worse scenarios where all the principles and in software, you’re really not buying anything other than we are buying the people. So you had tremendous attrition, 80% of the acquired business, the people walked out of the door in the first six months, and now you’re left with a running business and angry customers because nobody knows how to walk them through. Whatever it is that they are suffering with. So that would be my definition.

Anyone else? All right.

Audience Member 

What resource would you recommend for founders that would help us to be better prepared for acquisition? And then, what resource may you have for really getting the highest upside? Should acquisition occur?

Suresh Menon 

So if I heard the first question was, what resources would founders have in order to look for persistent as well? What resources could they look at?

I think there’s this case studies out there with McKinsey does a lot of them. HBR does a lot of them, but most of them are cautionary tales. So it’s more, a lot of the resources out there tell you what did not work, not necessarily about what did work. My recommendation, I think the only recommendation, that I can have is there is no straight formula. So have a trusted advisor. Have a trusted advisor who’s been either on the acquiring side or the or the acquisition side, who can guide you through the process because every segment is different. Every acquiring company could be different in terms of what they’re actually looking for out of an acquisition.

So, it’s important to have that kind of a trusted advisor. Some of my feedback here is, I’m talking as if I’m always, almost always on the acquiring side. I’ve done about 26 acquisitions, as you know, over my career, over the last few years. But I’ve also been on the other side. I have been acquired three times – acquired as part of a small startup into a midsize Silicon Valley company, acquired into a giant like Nokia, and then acquired into Informatica.

So, across the spectrum. I think is really about taking a look at what space you’re in, which one of these buckets you fall in because the motivations for an acquisition are quite different. And then the next step, I think is which I’ll go forward to a couple of slides, is really to understand what is the acquiring company like. And what are the challenges that you may have in integrating your business and making that acquisition successful. But again, I think there was a really good question out here saying, what is the success criteria for an acquirer and the success criteria for someone who’s selling their business may not always be the same.

So if I understood the second part of your question, how do you make an acquisition most valuable? Is that the best way to describe it, how to position yourself best? I think what I would do is understand what the motivations are for that acquiring company and then see where you go ahead.

Audience Member 

One last piece to that is because it just answered a lot of great things. I want to know, what are the signs that something’s falling apart for that we should be paying attention to earlier?

Suresh Menon 

Got it. That’s my cue to move forward. All right. Anybody else before I move on from this slide? Yep.

Audience Member 

One question for you, how do you rate the value of investment bankers in that process?

Suresh Menon 

First, any investment bankers in the room? Yeah. I mean, treat them as the, Ben you know the answer, treat them as a necessary evil and work your way around them. That would be my my advice. Know how to leverage them, but know how to work your way around them as well. Their motivations are very different than either the company that wants to acquire you or you who want to be acquired.

Evaluating Targets: Framework

All right? So I’m going to go forward a few slides here and just come to the deal framework. Or this goes back a little bit in terms of what is the acquiring company looking at as they as they evaluate target. So now, they’ve made the decision that I’m trying to fulfill a competitive gap. So I need to go out and do a little survey of the market. There are bankers that are coming to me all the time with a portfolio of targets. What do I now do? What framework do I use to start looking at evaluating some of these targets that are sitting in front of me.

Growth Acceleration

And I want to start with the growth acceleration part of it which is go back to the example of does this company have a really nice, compelling product? Are customers really happy, raving about the product, what is its challenges? Is it a technical product market fit, or is it really just a scale problem? They have just six to eight sales people. And we can see how we can take this company, and really scale it up. We don’t have anything to do. We just have to go and bring our go to market muscle behind this product. And, you can start generating leads. You’ve got people out there. We’ve trained our salespeople to go out there and sell it, and now hundreds of people are out there selling it. So there’s, there’s a lot of growth acceleration taking place.

Product and IP

But the other part of it and since we’re talking specifically about software, is the product and IP alright? It’s really just is the is the product mature enough? Because the product is going to require a lot of work in order to be retooled or re architected to scale, then that’s something that I don’t think a lot of large companies have the appetite to do.

Going back to the OPEX versus cash example. Though, there are exceptions where there have been a couple of examples where there’s been a very compelling AI based supply chain capability, the ability to forecast demand for a skew down to a particular location at a particular point in time, which is incredible, but then, now it needs to be scaled out. So what we decided to do is say, yeah, there’s this this goes against the the invest versus buy. And we said, let’s go out and acquire this company. We know that the whole underlying software platform has to be redone, but the AI and ML capability, no one else has it right. So it’s one of those exceptions where you said, yeah, there is some part of that product portfolio, the IP, that we cannot replicate. So, and even though it is going to require some investment, we’re going to go out and do to go out and do it anyway.

And then the product becomes part of the company, again, as part of the business case. What would we end up doing? We’d say during diligence that we know we have to retool this product. So we’re going to go out there and again, ask for under the what is below the line, cash, right? Saying, I need to set aside X amount of dollars in order to re architect, retool this and go to write it off as part of the acquisition. There are accounting rules that vary depending upon which sector you’re in and which part of the world you’re in, but the accountants always seem to find a way to make that, make that work, right? So that’s one way.

Again, you better get your estimate absolutely right. Don’t run out of money. Don’t make sure that when you’re doing the acquisition and you’ve done your diligence, that you haven’t come back with a bill that’s four times more than what you thought was going to be needed. Because again, then it’s another failed acquisition.

Which one fits the regulatory umbrella?

The other part of it is corporate fit is, this is probably the loosest definition, I think, of all the different parts of the framework. It could be, hey, I have a regulatory umbrella that I’m working under, and I want to make sure that out of the 10 companies that I’m looking at, which ones actually can fit under that regulatory umbrella. The other ones could be geographic, right? And that rules out some companies at some point in time. Although I think post pandemic, most of these acquirers are becoming a lot looser about where a particular target can might be, or which part of the world it might be, but that’s the geographic and the corporate side of it is one.

Holdings

There are things such as holdings. Where are your customers, for example, that tend to rule some companies out. I remember we’ve did an acquisition of a business that had a predominant set of customers. And a couple of countries where it would be impossible to for us to continue to do business as a US owned entity. So we had to scratch them off the list. So those are some of the considerations that you’ve got to think about. Again, no one is running a startup. I think to say I want to be acquired by X or Y so you’re going to do what you’re going to do to grow your business. But remember that as you start getting into this dance, you’ll have to start thinking about, what are some of those? Is this a good enough match? Or maybe the match is someone else?

Financial Model

Finally, the financial model. It depends, I think, on most. It depends upon this, not only upon the size of the company, whether it’s a mid sized company that is saying, I don’t mind a little bit of dilutive revenue, meaning the company’s losing some money. But it’s okay I can take on X amount of revenue, even though it’s going to depress my profitability, because I have enough room sitting there. Or, most likely, what happens is, I’m going to stomach this loss for two years. And then, if more than that, I’ve got to find a path to turn this around. So, the financial model is extremely important.

And again, it depends upon the stage in which the same company, if you fast forward two years, they may have a completely different appetite for how much of a loss making company they would want to take on, versus maybe some point in their past where the decisions or the appetite might be so completely different.

So those are some of the differences. What we what I’ve seen is, you know, as being part of a private equity owned firm for about four or five years. When you’ve got leeway and you are hidden from the public market, your appetite tends to be greater to take take on those loss making businesses, and maybe your horizon also as to how long you can tolerate some of those is much longer. With public companies, more often than not, it is how quickly, if it’s not accretive or neutral. How quickly can we turn it to be accretive or neutral? So that’s something that is loosely defined, I think, as at diligence time. And part of the problem is the acquiring company knows very little about the company that is being acquired. So they tend to make assumptions leading to the first problem we talked about, which is the 10% success rate, very few of them, then meet that business case.

Success Criteria of Acquisition

Now, on the last one, I think, is the assuming that this now goes through and you ask the question, what is the success criteria? As a founder, what is the most important thing for you is it to get that exit and make sure that there is a monetary benefit for the team, right? And then folks walk away. But that’s not why software acquisitions are made. Because IP sits in the brains of the people who are actually working on those products. So the most important thing to make these acquisitions successful is to make sure that you have the folks come along, because you can’t just say here’s the code base and go and figure it out, and we are all leaving. I mean, nobody who wants to acquire a company is going to go through that.

#1 Retention

So the most important one is the retention issue. So, companies will do all kinds of things. They’ll make retention of key people a condition for sale, making sure that you’ve signed what they think are pretty watertight contracts to keep you for some period of time, one year, two years. In all of the 27 acquisitions that I’ve been part of so far, I think it’s only in two acquisitions where the founders actually stayed on for more than two years. There were many cases where the founders only stayed on for less than 12 months. But this is now also, I think we got to separate the leadership and the rest of the organization. There is the retention aspect that acquiring companies take very, very seriously in software. Very different than, let’s say, in hardware, where maybe the supply chain, the manufacturing strength those are more important than actually the people, but that’s completely not applicable in software.

#2 Cultural Fit

The other part is cultural fit. You can see that, I mean, I talked about Zebra hardware and software. There is a hardware culture, but even within in software, there are so many different kinds of management styles which are led by the the leadership of the acquiring company, and then you’ve got your own culture inside of your own organization, which now has to go in and become part of a larger culture.

And it’s, it’s very important to understand that from an acquiring company’s perspective, because they really like to understand, how is that culture going to be translated inside of this acquired company? Because, you know what? Why? It doesn’t matter how big the acquiring company is. When you’ve got a significant group of people that come in with their own culture, the company’s culture is going to become some kind of assimilation of the big companies culture and the folks who’ve come in. And what is that new culture going to be, who’s going to drive it right? I think these are now becoming much more important discussions that are happening even at the executive leadership level.

In the past, it was all about the numbers and whether we’re going to going to achieve those numbers. That is no longer the case, and primarily because of that dismal 70-90% success rate of acquisitions, lot of people have learned their lessons with doing acquisitions the wrong way.

#3 Integration

The other part is the the integration. This is the boring stuff. What systems did you use to book your business. What are your financial systems? What is your CRM system? Now, all of those things need to go in and be merged into the larger companies, back end systems, because no CIO in those companies are going to say, you can have your own thing that’s never the response from those folks. And this is where, believe it or not, this is where a lot of acquisitions fail, because what ends up happening is those hard, cutover decisions. Yeah, it’s three months max. You can use it on your own custom CRM. Within three months, you’re going to migrate you to the company’s corporate Salesforce.

Guess what happens? For about four to five months, salespeople who came in from the acquired business, who had to go out and sell to continue selling, in order to make those business case numbers work, are now unable to work because their system is locked down. They’re not given access to Salesforce. It is these, what we would all call the stupidest things possible that can go out and hurt an acquisition.

Again, how much control do you as the organization that is being acquired have on this? Probably not a lot. But these are some of the questions that when you’ve gotten to the stage, is worth asking, because typically, the business side of the company is who’s doing the acquisition. I.T side only gets brought in once the acquisition is ready to close, and at that time you say, Oh, they’re not on Salesforce, okay, two months max, and then we know we’re going to kill their systems, whether they’re ready for it or not, right? You can’t build your customers. You can’t support your customers, because the support systems that you used to use, the applications that you used to use, are no longer working inside of, working properly inside of the new environment.

But this is one way heads up. If you want an easy integration, please make sure that you know you are looking at it, because it’s the last thing you think of as a founder, and it’s really about how my key people going to become part and play a larger role inside of the company. How is the product going to be sold? What happens to my old website? Those are the kinds of things that people mostly worry about. No one really talks about or thinks about this until it’s too late.

#4 Growth Path for Founders

And then there’s a last one, which I touched upon, what is the growth path for founders? And this is, I think it is probably a worse, more dismal record than the 70-90% is the target company’s ability to to retain the leaders of those acquired companies, out of the six acquisitions today that I have as part of my portfolio. Two of the former CEOs are still here, still running the businesses and very engaged, but there’s quite a few people who are, you know, want to go back out and start the next thing be. And it is the single most important thing to keep in mind is, and the reason why these two folks have been able to build a career at a company like Zebra, is because they have understood that they no longer have control over every single part of the business.

The ones who’ve left said, I’m going to stick out my retention package, and the moment the last set of shares, I’m out. The other ones who said, I want to keep running marketing for my business. I want to keep running sales for my business, professional services, customer success, legal, HR, because I know how to do that for my business, and I’m not willing to let go. It’s the control aspect is probably one of the biggest reasons why a lot of founders lead, right being able to not have that control anymore, and you feel helpless. After having run this for so long now, you say, Oh, you’re responsible for maybe running sales, or you’re going to run the product organization, but that is a hard bridge to cross.

So that’s one of the most important factors as well. In terms of the success of the acquisition and how long founders can stay in even if they have the recognition that they need to be, they need to handhold their own organization and make sure that they fit in into the acquired business successfully, and then drive off into the sunset, so that’s.

Now, there’s so many of these reasons, right? I mean starting from the strategy, and I use this here because I think goes back to Mark, where he said, when elephants dance, what happens? They said, sometimes the ants that they’re dancing with tend to get crushed. And this is really the reality, I think, of what happens to a lot of companies.

Good innovation goes to die.

But at the same time, we’ve also got examples, like at Informatica, where a bunch of four acquired businesses went from zero revenue to more than 50% of the company’s revenue in about seven years, and became the fastest growing businesses. So it’s not always that you’ve got the this is doomed, but there are lots of very great stories in terms of how the acquired business transformed the parent business and took into an entirely different direction.

There are also cases where an acquired business came in became so successful that the company shed its core business and became the acquired business as well. So there are all these examples out there, but I think, in summary, I think the most important thing here is going with your eyes wide open. You try to try to picture yourself as to why you know a particular acquirer is coming after you. It is interested in acquiring a business. Try to understand how to maximize your value, right? Given what their constraints are, and then go off and look at all of the lessons learned and what can succeed. What factors are needed in order to succeed? During the diligence, getting the business sold, and then how to transition that? Because in some sense, it doesn’t matter what you know, as a founder, you do, but in the end, you’ve got your entire team who’s gone in and become part of another business. And do you want to see your legacy grow inside of that with more sales people, with more marketing dollars thrown behind it, and so on.

And then to be able to scale up and give a really solid career path to most of your team that you know has gone across and made this transition happen.

So that’s all I had in terms of slides. I was just wondering, you know, just opening it up for discussion, any questions, any comments?

Q&A

Audience Member 

How much in the either rationale or measure success, does overall economic enterprise value play into it? Right? Like you think about a hardware business buying a software business, very different multiples from a valuation standpoint. But, is it always just the oh, this is a means to an end that can help us what we’re doing, versus Hey, this is why this company is going to be more valuable because we own them now.

Suresh Menon 

So the question is, is enterprise value kind of being considered as part of the acquiring thesis? And the answer is, sometimes, in the end though, this is no different than, and I would put it as I’ll give the address, doctor, example, or some of the other competitive acquisitions that we’ve made is, it’s no different than buying a house, right? If you were, let’s say a pre pandemic, buying a house in a certain market where there weren’t enough buyers to for that business, versus, let’s say, in a different part of the world, a different part of the states you had more than one, you had 25 people simultaneously trying to bid, which is kind of what my neighborhood was like a few years ago. Then enterprise value goes, completely out of it’s really question of how much the acquirer, how badly the acquirer wants that business, right?

And typically goes back to the second set of slides that I had, which is really about what, what need is it fulfilling inside of the acquiring company? If they’ve set themselves a goal to go out there and own a certain new market segment, I’m expanding into a completely new market, and I need to be there, or I have this competitive problem which I need to solve. And there’s no way that I can solve it in three years, if you know, if I, you know, fund the best and brightest to do this. So I need to go out and urgently plug that hole in my competitive analysis here at that point in time, it’s really just about what the company’s acquiring companies willingnesses to solve their problem, in the end. Does that answer your question?

Audience Member 

I guess it’s like, rarely is it just a factor of capital allocation, very rarely, almost never, in software you think of like Henry Singleton at Teledyne, right? Like he was a one of a kind, like that just does not happen.

Suresh Menon 

Yeah, it doesn’t, does not happen. Yeah.

Audience Member 

How would you? How would you class the sale or the purchase by Adobe for Figma? I’ve heard that be described as doing all they could to protect their own cap table against the incumbent. What might that look like for you?

Suresh Menon 

So, I’m not sure if everyone heard the question, but how do you rationalize Adobe’s acquisition of Figma? I think with Figma, the question is, was the company going back to the enterprise, the value question earlier, was the company worth the amount of money that Adobe is going to throw at it, or if they get approval, I guess? And the answer is no. Nobody would have imagined that Figma would have had that kind of value. But in this particular case, and again, not being privy to discussions inside of Adobe, but it clearly looks like they saw a significant threat to their to their business, and decided it’s better to own that asset now.

Now the question is, which one survives? It’s almost like the example I had before, which you have some companies that go out there and buy to kill innovation. I think that was the example used. I don’t think this exam, this acquisition, is to kill innovation. It is about trying to extend, you know, and get there faster, because they started seeing product led growth being done very well by Figma versus Adobe. Stop down. I’m going to sell to the CMO and push this down. You know, to my users, they saw a new pattern emerging, and it is a significant threat to their business, if Figma continues to grow the way it is. So and again, it goes back to how badly does Adobe need that business, clearly, very, very badly to pay those many billions of dollars for Figma.

Audience Member 

Two questions for me. In your 27 acquisitions, I think you mentioned, how many of those did you find the target? And how many did the target find you? Could you speak also about your role internally acquiring businesses versus an internal corp dev team, where M&A team that may be working in support of you.

Suresh Menon 

Got it. So don’t think I need to repeat that question. But, I think I’ll start with the second one. In terms of the role itself, most there are very few software acquisitions that are led by anyone other than the people running the product businesses, although I think out of 27 there was one that was actually led by sales, and that was one that ended up failing because there was not a lot of product sponsorship behind it. But then once it happened, it went ahead and and got done so in all of my roles. So maybe I’ll take a step back.

The first part of my career was in product management. In product management, you’re always looking at both, how can you get engineering to build what you want, and if they can’t do it in enough time, then I’m going to go out and make a case for for acquiring companies. And then later on, in the last 10 years of my career, I’ve been running product be used as a general manager, which means there’s engineering and a lot of the other functions that go along with it, including strategy and and product management and customer success. Sometimes, in all of these cases, the acquisition is being sponsored by either me or my peers.

Essentially, it’s pretty much product led. There has to be a product sponsor who’s going out there and saying, I need this, and here’s why, because here’s my portfolio, and for all the four reasons that I had there, I’m going to be filling these gaps, or I’m going to go out into this adjacency. So it’s almost always product led. There are exceptions, like I said, where sales sometimes says, I need this business in order to just make my number for next year. But those are that’s the worst possible reason to buy a company.

The first part of your question was, out of those 27 acquisitions, how many of them were ones that came to us versus we went out and actively pursued? I would say 3/4 of them were ones that were inbound. Goes back to the role of those, those evil bankers, but there were some that we actually actively pursued and but it happens much more rarely and it happens in cases where you’ve already got an existing relationship, an OEM relationships relationship, a channel relationship, for example, you already known, you’ve known the entity quite well, and at that point in time, you start the process with them. Typically, though, even though, even there, what happens is they, if they’re a smart founder, what they’re going to do is go out there and say, okay let me start an official process. Let me go engage a banker now, and I’m going to go out and see if I can find other buyers, because the more the better.

Mark Littlewood 

Right. Suresh, thank you.

Suresh Menon

SVP and GM Software Solutions, Zebra Technologies

Suresh is responsible for strategy, development, & management of Zebra’s Software Solutions, a portfolio of AI-powered workforce management, task execution, communication solutions, prescriptive analytics & self-directed inventory management.

Before joining Zebra in 2020 he served as Senior VP & GM of Informatica’s Master Data Management and 360 Solutions business unit. There he led the transformation from an on-premise, perpetual licensed business to a high growth, cloud native SaaS business.

Earlier in his career, he was Director of Product Management at Search Software America & Identity Systems before & after their acquisition by Nokia.

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