Is software M&A good for the customer?

Vinnie Mirchandani asks the burning question, "How does software M&A help buyers, not just investors". He cites the fact that "between CA and IBM and Oracle and HP and Microsoft and Infor and Sage we now have a database of over 200 software industry acquisitions over the last 15 years."

Is there any evidence that this M&A has been good for the customer? It depends on the vendor doing the buying. I don't have deep visibility into all of these companies, but I think there are examples of positives and negatives here.

Microsoft's roll-up of the ERP lines from Great Plains and Navision has been largely positive for customers (sometimes tough on resellers, but that's getting better). Large customers do have the benefit of rolling their ERP license into an enterprise agreement with Microsoft. Integration is dramatically improved, as is usability. The whole "integrated innovation" term, which sounds like Microsoft marketing fluff, really has some meaning to it. If you've seen the UI, the integration to the stack, etc of the latest versions of the Dynamics products you know what I mean.

Can't comment on IBM and HP because I don't follow them at that level. CA? One of the best quotes I've read on a blog in the past year was Dennis Byron describing a particular software company's strategy this way (roughly paraphrased)...

It's a milking of maintenance revenue streams that would make even CA's Charles Wang blush.

He was talking about Infor, whom Dennis Howlett has referred to as a "Maintenance Parasite". Love that term. Sage is an impressive maintenance parasite, and a great example of how this consolidation hurts customers. Sage itself accounts for more than 50 of the 200 transactions. It is at this point less a software company than an investment firm.

The Sage business model is quite simple

1. Acquire a software company with legacy products and a large customer base
2. Slash R&D expenditures down to the bare minimum required to justify charging customers a maintenance fee
3. Aggressively sell services to the acquired customer base
4. Collect the cash and use it to fund the next acquisition

Looking just in the US market for a moment. Peachtree, State of the Art (the original publishers of MAS90/200/500), Best Software, Interact Commerce, and Timberline are some of the major regional acquisitions for Sage.

I've looked at the last three years each of these companies spent as independent company. I've calculated the R&D spend as a percent of revenue and the operating margin over those periods. I then map that against Sage, and get he following result.

Reading the chart: Peachtree in its last three years as an independent company (1995-1998) had an operating margin of -1%, State of the Art (from 1994-1997) had margins of 14%, etc.

Note that every one of these companies was less profitable than Sage, with Interact in heavy investment mode and operating at a significant loss. After acquiring each of these companies you'd think there would be a big hit to Sage's margins, right? The reality is in some reporting periods the figure might have moved by a percentage point or two, but Sage chugs along in the mid 20's. That tells me the acquired businesses are snapped to the Sage model very quickly.

None of theses businesses saw revenue explosions post acquisition, so the vast majority of business model change comes in cutting expenses, with product investment taking a big hit. Take a look:

Looking at this chart, is it any wonder most of these product lines are not doing well today? Customer adds are down across the board. There are product quality issues and little revenue growth. It's taking almost a decade to do an architectural rewrite of the MAS90/200 suite. Accpac customers wait a year for core bits of functionality (that is provided via OEM) to be compatible with the latest release. There is very little that is of benefit to the customer in a strategy like this.

To the answer to Vinnie's question is that it all depends on the rational behind the M&A strategy.