M&A activity in Europe increased in 2021 as the pandemic appeared to be under control and buyers and sellers regained confidence. Despite concerns about economic fallout from high inflation in the latter half of the year, 2021 saw a 55.1% increase in deal value over 2020, demonstrating the European M&A market’s ability to adapt to whatever challenges 2022 may throw at it.

Here at Volaris Net Europe, we continue to engage founders and owners of software businesses across Europe, to build long-term relationships, share insights, and contribute to the European software ecosystem. As the number of acquisitions in Europe returns to pre-pandemic levels, have you considered what type of acquisition might be right for your business?

We understand that leaders and employees are best positioned to continue operating autonomously as they did pre-acquisition. However, some companies decide to merge with an existing business within our group, a practise known as a tuck-in acquisition. Tuck-in acquisitions involve the merging of a smaller company into a larger company and offer numerous benefits to businesses, particularly in the technology sector where unique resources and capabilities can make or break a company.

Utilising Resources for Market Domination

When two companies in the same industry merge, they gain more control and influence in that market. The companies benefit from each other’s ideas and resources while simultaneously eliminating a competitor. Previous acquisitions within our group have experienced these advantages first-hand.

David Wilkes, co-founder of Occam Systems, sold the company to Kinetic Solutions, a direct competitor, in 2018. Both companies were founded in 1998 and had been in operation for nearly 20 years. Both businesses began to encroach on each other’s customers and product offerings as they grew. While Occam was encroaching on Kinetics’ territory by developing conference management software, Kinetics expanded from their initial event management software into the student housing space.

Kinetic, the larger of the two companies, eventually gained a larger market share. Kinetic controlled the majority of the conference software market and had twice as many customers in the student housing sector as Occam at the time of the acquisition. Wilkes noted the market’s saturation, and the difficulties Occam would face in advancing the market in the UK. Instead, he concluded that if they couldn’t beat them, joining them might be the easiest option.

Since the acquisition of Occam into Kinetics, Wilkes devoted his focus to product development and has enjoyed a new marketing team that Occam didn’t have before. Joining Kinetic also provided greater access to sales and HR capacity with the ability to provide career trajectory for longstanding high-performing employees, which wouldn’t have been possible at Occam alone. As a result, employee retention was higher. Customer retention also improved as a result of the merged companies’ ability to unite their communities and gain market insights rather than competing against one another.

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“Pre-acquisition we had reached a plateau and now we continue to grow in new and exciting ways.”

– David Wilkes, Co-founder, Occam

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Product Diversification and Customer Servicing

Tuck in acquisitions also allow for the diversification of a company’s product and/or service offerings, resulting in the development of a strong brand with a prominent market presence. They also increase brand recognition and business profitability by allowing you to provide superior customer service. Companies that specialise within a particular vertical market have a finite pool of customers. While this may be reasonable where the market is large enough to support several competing companies, when the customer base is too small, operating costs may exceed revenue.

FIVE x5 Solutions is a distillery management software provider led by general manager Caroline Calhoun. During her first five years at FIVE x5, Calhoun noticed the most significant changes once they began to see their primary competitor as a potential partner.

Whiskey Systems has been FIVE x5’s main competitor since its inception, positioning itself as a more affordable option. Customers frequently switched between the products of the two companies, creating a strong sense of competition between them.

In 2020, Whiskey Systems joined Five x5 as a tuck-in acquisition. On customer reactions to the acquisition, Calhoun stated:

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“The biggest win to everyone was from a Whiskey Systems customer who had also used FIVE x 5, telling us: ‘I almost forgot you guys are one team now. This is so rad, you’re still the people that I like, but I’m just using a different product to bridge the gap between.’ Being able to maintain the reputation of both companies was pretty cool.”

–Caroline Calhoun, General Manager of FIVE x 5 Solutions

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Since the acquisition, Whiskey Systems has retained 100% of its employees and customers while increasing new customer growth by nearly 50%. To provide even better service to their customers, the newly larger company established a new consulting practise that did not exist prior to the acquisition. This product diversification utilised the two companies’ resources and improved their overall market offering to customers.