Who You Gonna Call? Strategic M&A

In part I, I talked about how up-front investment in a high-caliber strategic business development function helped to save Loudcloud when an existential crisis hit in 2002.  But the value of strategic business development didn’t end there.  In fact, it was only beginning.

Opsware V1: Single product, single customer

The EDS transaction closed in mid-August, and we started into the fourth quarter of 2002 in much better shape than we’d entered the first quarter.  That said, we still had plenty of challenges.  We were a single-customer, single-product company.  Moreover, the product—software that automated the administration of servers—was powerful but far from ready for broad commercial adoption.  It had been developed solely for internal use by skilled (and somewhat forgiving) Loudcloud system administrators in a controlled environment.  It was difficult to sell and hard to implement, requiring significant process change on the part of the customer’s IT staff.  It wasn’t easily consumable in small chunks, leading to protracted sales cycles and long implementation periods.

Of course, we had 60 great engineers and plenty of cash, and they lost no time starting the work needed to make the software easier for our small but talented sales team to sell.  While they did that, the BD team led the development of what would become a selective but highly productive M&A strategy to turn Opsware into a broad data center automation platform.

Kicking off the M&A strategy

Working closely with the product and sales teams to understand needs and build consensus, we started identifying and prioritizing categories adjacent to our core server automation category and tracking the key players in each.  Together, we developed a set of criteria for acquisitions, including technical factors such as architectural compatibility and APIs as well as non-technical factors like location, team size, culture and financial profile.  As a general theme, we wanted products that fit with our core proposition of data center automation and were compatible with our server product, but were easier to sell and implement, opening the customer’s door for a subsequent server automation sale.  We briefed the board repeatedly to prepare them for specific acquisition proposals to come.  Thus armed for battle, we set forth.

Going into battle

Any good strategy allows for opportunism and, as it turned out, our first acquisition was highly opportunistic and somewhat unusual.  Tangram was a 20-year-old company, publicly-traded on the OTC “pink sheets” exchange, with a market cap of about $10 million.  Their product was IT asset management software, and while their revenues were growing slowly, their 200 enterprise customers were very satisfied with the product.  We seized the moment and picked up $10 million in annual revenue for stock valued at less than $10 million—a bargain.  The deal brought us a complementary, consumable product, 200 new prospects for server automation software and a low-cost base in Cary, North Carolina, that soon became our “offshore” location for support and sustaining engineering.  In short, a good start to our M&A plans, just four months into our new life as a software company.

Our next acquisition, a year later, was much more strategic.  Our customers were beginning to like our server automation product and wanted to know if we could solve their next pain-point: automating the configuration of network devices such as routers and switches.  We identified the four leading players in network configuration management, visited and screened them all, and ran a competitive process to get them competing to sell to us.  (It’s always better to have them trying to convince you to buy than for you to be trying to convince them to sell.)  We got the one we wanted, Rendition Networks, for a combination of cash and stock valued at around $33 million.  In addition to 30 new enterprise customers and a strong engineering team in Redmond, Washington, we would now have an attractive starter product and a combined server-network automation offering that put us further ahead of our only credible single-product competitor, Bladelogic.  Within a year, Opsware Network Automation was generating over 20% of our bookings.  Even better, the Rendition purchase positioned us for a major OEM deal that would further accelerate Opsware’s breakout lead.  I’ll talk about that in the next post.

With servers, network devices and asset management in the bag, storage was the missing piece of the puzzle.  That proved to be harder—there were few storage automation startups to begin with and none that looked like a great fit.  We ultimately did acquire a small startup named Creekpath Systems in 2006 for $10 million in cash, closing their small Colorado HQ and moving a few team members to Redmond.  Unlike our other acquisitions, storage automation proved just as hard to integrate and commercialize as it was to find an acquisition target, and this was the least successful of our purchases.  Notwithstanding that, we now had a unique full data center automation story: servers, network and storage.

Our fourth and final acquisition was in an emerging category called Runbook Automation.  Having automated individual functions such as server provisioning or router configuration, our customers now wanted to automate entire IT workflows across servers, networking and storage, integrating with other systems such as monitoring or ticketing.  Here there were just two viable targets: RealOps in Herndon, Virginia, and iConclude in Bellevue, Washington.  We knew we wanted iConclude, but again a competitive process of negotiating with both companies helped to drive a speedy transaction at a fair price of $54 million in cash and stock in March 2007.  (iConclude’s founder and CEO, Sunny Gupta, now runs Apptio, an Andreessen Horowitz portfolio company).

Although we only made four acquisitions in five years, spending less than $100 million in cash and stock, the M&A strategy played a vital role in transforming Opsware from a single-product player, solely dependent on one giant customer, to a full-suite data center automation market leader with hundreds of enterprise customers.  The acquisitions positioned the company for a major strategic partnership with a technology giant in 2006 and a billion-and-a-half dollar sale to another a year later.

Who you gonna call?

Just like the Loudcloud sale to EDS, Opsware’s M&A strategy relied on many essential ingredients and actors: an aggressive but disciplined management team, outstanding engineering, marketing, sales, legal and finance functions, an acquisition currency and a supportive board.  Again, however, a small effective business development team was there to leverage these assets and drive the process to achieve results while the rest of the company continued to fire on all cylinders.  While we acquired four companies, we evaluated hundreds and gained massive industry insights in the process.

What’s your M&A strategy?  Who’s driving it?

Next up: Strategic Distribution




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