I took a really great mergers and acquisitions (M&A) class back in the day where the professor outlined a methodology for evaluating public companies. The Synergy Premise was a component of this methodology (i.e. what economic gains are the expected outcome from the M&A activity). These economic gains were classified into two buckets: 1. Revenue Synergies (making money) and 2. Cost Synergies (saving money). Let me illustrate the two buckets with software examples:
- Revenue Synergies: e.g. when SAP bought Sybase, SAP’s strong sales channel was given a whole new set of complimentary database and mobility software products to provide additional value to their existing customer base. The end result: from 2010 (the year Sybase was bought) to 2011, SAP revenues rose 14%.
- Cost Synergies: e.g. Oracle’s acquisition of Sun Microsystems was rumored to be a cost synergy play given Sun’s operations had been struggling and Oracle’s comments around the acquisition were about running Sun at “substantially higher margins”.
So what this methodology does not address, and that I’m interested in discussing here is what happens to the developers and software products that typically merge under larger R&D umbrella(s) post-integration? From a business perspective you may assume these developer resources are interchangeable. Eureka – Development Synergies! For example, I can take some developers from a legacy product and reassign them to another understaffed product without hiring (therefore saving money). Or I can combine two sets of development groups to make an integrated product set that can demand a premium price (therefore making money).
My experience has taught me these Development Synergies rarely exist. Have you ever met a developer who has inherited code and has not claimed it was poor quality? I haven’t. That’s at an individual level. Now we layer teams, departments, etc. and this problem becomes compounded. Another product’s code is never at the same quality, and additions or alterations by outside developers most certainly require rewrites. I’ve even heard of post-acquisition stories of startups that have been bought and their code completely re-written by the acquiring company’s engineers. Is this just developer hubris? I don’t know. I can only observe and secretly believe there are Development Synergies waiting to be unlocked out there. Imagine the valuation implications if this nut could be cracked?
I am interested in hearing from anyone who may have seen these illusive Development Synergies and how they were actually achieved. Feel free to email me or feel free to comment below.