Don't Let M&As Steer You Off Course

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As a consultant working with a Chinese language learning company called Qooco, Karl (Bill) Scholz understood the conventional wisdom that “nobody ever gets fired for buying IBM.” So, he felt confident when Qooco opted for Big Blue’s speech recognition technology in 2007.

However, in January 2009, his feelings turned to discomfort as IBM sold off its business to Nuance Communications Inc. While the decision to go with Big Blue did not cost any jobs, problems ensued. Qooco found itself trying to establish relations, influence product design, and attract attention from strangers. “For a while, our attention was split between enhancing the system and trying to figure out how best to interact with Nuance,” says Scholz, president of NewSpeech Solutions and AVIOS (the Applied Voice Input/Output Society).

Many speech technology purchasing decision makers find themselves in similar positions. In an industry rapidly evolving, acquisitions have become a common way for vendors to expand their businesses. Last year brought more than a dozen purchases, and Nuance Communications Inc. has made more than 30 acquisitions—including nine in 2007—since the turn of the millennium.

 Suppliers have focused on filling out their product lines; driving down costs; and, in the case of start-ups, cashing in on the fruits of their labor. But customers often feel the ripple effects from such changes. They have to alter how they interact with their primary vendor, try to safeguard equipment that is often sent to the scrap heap, and find a way to have their voices heard in larger, more congested boardrooms. Since purchases are expected to continue for the foreseeable future, what can customers expect from such transactions, and what can they do to protect their interests?

Part of the Circle of Life

Because consolidation is a typical phase in an emerging technology’s life cycle, acquisitions should remain common in the speech industry. When a new market, such as voice biometrics, buds, the ground is level and start-ups sprout. They race to create buzz and build market share. Initially, suppliers grow because there are so many new accounts. Eventually, however, the market matures, the penetration rate increases, and opportunities become scarcer. As those changes unfold, a start-up needs to find a defendable niche, grow significant market share, or find a buyer in order to survive.

Another factor in the merger mania is that speech is becoming a common user interface. “Speech solutions no longer stand by themselves; they are being integrated into many other products, such as VoIP [Voice-over Internet Protocol] systems and unified communications applications,” notes Steve Cramoysan, research director at Gartner Inc.

Like other high-technology sectors, speech is volatile. It has become difficult—some might say impossible—for one vendor to develop all the necessary components. Because large companies tend to be bureaucratic, they often cannot move fast enough to adapt.

“Acquisitions help suppliers fill any product line voids,” notes William Meisel, president of speech consulting firm TMA Associates.
For customers, an acquisition’s impact is felt first on the personnel front and later with the underlying technology. Company principals try to keep news of a possible buyout as quiet as possible; however, a variety of parties is involved in the process. In fact, it is common for vendors to speak with customers and reseller partners about the potential change well before it is announced. They do not want customers and partners learning about the merger by reading the latest headlines.

However, problems arise because not all parties keep their mouths shut. As the chatter grows, rumors circulate. Rather than servicing the customer, employees worry about how the potential purchase may affect them. They revise their resumes, call friends about job openings, and check newswires for the latest information. As a result, the time needed to answer a customer’s call can lengthen. The distractions begin weeks, or even months, before the sale is announced, and they end only after the buyer has fully integrated the acquired company into its operation. This process can drag on for months or even more than a year, depending on the size and complexity of the deal.

We Love Techies

Once a deal has been signed, the buyer may start to cut staff. “Usually, the new company keeps the technical personnel,” notes Thomas Schalk, vice president of voice technology at ATX Group, a telematics provider. However, the client may have to interact with new sales and support personnel.

For the customer, the most important decision the purchaser makes is determining what will happen with the acquired technology. That move depends on several factors, starting with why the vendor bought the company. If the technology is an item in an emerging market and there is no overlap, then the product usually will continue to be supported as the combined company moves forward. In fact, vendors often make acquisitions to help round out their product lines, so keeping and enhancing the product becomes a straightforward decision.

Sometimes, the choice to discontinue a product is also simple. For instance, a start-up developed a novel technology and then OEM’d it to various large corporations that are direct competitors. In that case, the acquirer has little incentive to invest time and money to help other vendors find uses for the technology. Moreover, the other OEMs would not want to have part of their sales buttressing their competitor’s bottom line.

In other instances, the decision process is not as clear-cut. If product overlap exists, “the best option wins,” says Jeff Foley, senior manager of solutions marketing at Nuance. While that statement sounds logical, it may not play out in reality. Sometimes, internal politics overrule technical merit. “Often, the acquirer’s product will win the battle for acceptance,” ATX Group’s Schalk notes.

Mapping Out the Future
While that scenario may not sit well with customers, they will be given time and maybe some help from their new master in moving off of their current solution. “It is in the best interest of the purchaser to keep the current customers happy and migrate them to its equipment,” says Dan Miller, senior analyst and founder of Opus Research.

As the new company is assimilated, the larger supplier will lay out a road map that outlines future product developments and, if necessary, a migration path to a new system. “Most vendors continue to support the current product at least until a new release combining both companies comes to market,” says Elizabeth Herrell, president of market research firm Communication Initiatives.
Combining the different solutions presents the vendor, and its customers, with challenges. Traditionally, speech suppliers built their products atop proprietary hardware, and the user was often forced to scrap its existing system and start anew whenever an acquisition occurred.

How to Move from Here to There

Increasingly, the market is shifting from hardware- to software-based systems, so the migration challenge is being mitigated. “While it may not be simple, companies can move from one system to another more easily now than they could in the past,” Schalk says.

Standards, such as VoiceXML, are designed to help businesses jump from one system to another. Theoretically, the vendors work from common design points, so the different solutions will have a similar code base. While they can help clients, standards are not a panacea, for a couple of reasons. First, the standard typically provides only baseline functionality. To differentiate their wares, manufacturers often layer features. The more special functions they add, the more difficult it becomes to swap one system out for another. NewSpeech Solutions’ Scholz worked with a VoiceXML-compliant system but found that a vendor had extended its systems, making it more difficult to port it to the new environment.

In the end, the customer faces the decision of buying into the new product road map or moving in a different direction. “After an acquisition, companies will opt for a new system; in fact, such decisions are not uncommon,” Communication Initiatives’ Herrell says. Usually, they wait until the current system needs to be refreshed or when it no longer meets performance criteria. For instance, in some cases, they may have a solution that is a few years old and struggling to keep pace with new demands. So, taking a step back to put a new solution in enables the customer to move a few steps forward and add needed functionality.

Looking on the Bright Side
While there are some downsides, customers also can benefit from acquisitions. Often the smaller company has developed a niche item that complements what the larger vendor already offers. The company can roll any acquired technology into its existing line and create a more complete, integrated solution.

In addition, “the bigger vendors can allocate more resources and spend more money promoting the product than the smaller company,” Nuance’s Foley notes. Apple, Google, and Nuance are billion-dollar enterprises that acquired smaller speech suppliers in the past year and dramatically increased the reach of their new products.

Customization may become easier. If a client has unique vertical industry requirements—say, financial services’ regulations about call recording—that client often has to tweak the speech system itself to support such functionality. When an industry Goliath takes over the product, someone else may take on that work. The buyer may have a large reseller network. While the industry giants focus on horizontal sales, resellers often target vertical markets, such as telcos, health care, or financial services.

Improving Business Processes

In some cases, the reseller may isolate the customer from any product migration issues. “Large Fortune 500 companies hand integration and migration worries over to their partners,” Opus Research’s Miller points out.

In addition, the change can streamline a customer’s business processes. Given the recent downturn, many entities have established a corporate objective to reduce the number of vendors with which they work. That’s because there are costs associated with doing business with a variety of vendors. Each time a company adds a supplier, it must go through a complex legal review before agreeing to the vendor’s terms and conditions. While the fundamental elements are similar, the focus and wording of those agreements vary from one vendor to the next. Reviewing those items requires time and money. So dealing with fewer vendors reduces the volume of work in such areas as procurement administration.

In the end, customer input on a potential purchase is limited; vendors make decisions that they view as their best option. Since acquisitions are so common, businesses should take steps to protect themselves. “The customer should inquire about and track the vendor’s financial health,” Scholz says.

If a vendor is struggling to pay the bills, putting itself up for sale is one way to solve the problem. Finding financial data is simple with large public companies but gets more difficult with smaller private enterprises. They may not be willing to divulge their financial information. Trying to discern their health can mean doing a lot of legwork ferreting out the data, so the customer has to determine how much effort it wants to extend.

Relying on a Start-up Is Risky

Corporations should be aware of the risk they are taking. If they bank on a start-up, chances are good that the organization will change—dramatically—over time, either by being acquired or as a natural part of its growth. Consequently, the client needs proactively to monitor the relationship and keep its ear to the ground for information that could influence its interactions, such as a corporate restructuring or the possibility of being purchased.

Another way a business can protect itself is to include language in the original contract giving it the right to renegotiate the terms if an acquisition takes place. Such wording is now fairly standard. In the event of an acquisition, the customer may be offered a “sweetheart deal” to stay, since the acquirer will probably want to minimize disruptions at the beginning of the assimilation process.

If the vendor is acquired, meeting the new owners is recommended. Customers should speak with the management team first to make certain the vendor knows who they are. In addition, the client should describe its desires and concerns with the relationship. Taking that step helps to forge a relationship the way the client wants it. Also, the customer gains a better understanding of the vendor’s product strategy. Finally, the client should be mindful of opportunities to influence the development process, so enhancements are in line with its needs.

The reality is that no customer is secure. Opus Research’s Miller notes, “Established companies, like Avaya, Nortel, and Siemens, have gone through dramatic restructurings.” If a customer isn’t safe buying Avaya, IBM, Nortel, or Siemens, then there is risk in every product purchase. Businesses cannot ignore the market realities; instead, they need to be aware of the potential challenges and do what they can to protect themselves.

Paul Korzeniowski is a freelance writer who specializes in technology issues. He can be reached at paulkorzen@aol.com.

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