Hi guys:
Why do some software companies go out and acquire customers in order to gain their clients, rather than just building their own product with the same function and sell that to those clients they want to win? Even if you sell your products at a discount/cheap price, it's still more economical than paying to acquire a competitor at a very high multiple, no?
Thanks!
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Biggest factor is time. If a standard hold period is 3-6 years, hard to justify trying to greenfield a platform or significant investment because you need to not only perfect the software, but demonstrate sales and take among the target customer base
Cross-selling - if there is already a platform software, going out an acquiring incremental features and customers allows a significant cross-selling opportunity at very high margins. Example would be an EHR system that acquires a credentialing application to bolt on. It can now up-sell that to its customers for an additional recurring fee, and potentially gain new customers of the target to sell the entire EHR or certain pieces of it that compliment the credentialing application.
From my understanding, you also have to take into account patents. Acquiring a company typically means you acquire the patents, and therefore the right to use, further develop, and sell the software. I believe you also see patents as the main driver for M&A in drug companies/pharmaceuticals (correct me if I'm wrong).
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