In 2015, semiconductor industry analyst Malcolm Penn predicted that the then-150 independent semiconductor companies with more than $250 million in revenue would be halved within five years due to mergers and acquisition (M&A) activity. Although this prediction sounded bullish to many industry observers, that’s exactly what happened. Since then, others anticipated that the remaining 70 to 75 companies would further consolidate to just 20 to 40 by 2025 – and we’re on track to hit that mark as well.
M&A deals in the semiconductor industry are heating up again after the lull that followed the big M&A push in 2014 to 2017. Big semiconductor acquisitions in recent years include Intel’s purchase of Mobileye for $15.3 billion, Analog Devices’ acquisition of Linear Technology for $14.8 billion, Toshiba’s acquisition of OCZ Technology Group for $35 million, and Broadcom’s acquisition of Brocade Communications Systems for $5.9 billion.
More deals are imminent due to the higher cost of capital, inventory reductions, and declines in earnings, with many chip companies cutting costs, reducing headcount, and pushing out (but not canceling) capital expenditures for additional capacity. There are two things happening with this acceleration. One is what is referred to as a “string of pearls” acquisition strategy by going up the stack into software in search of higher-value transactions. The other, the global economy moving from a hydrocarbon- to an electronic-based one, is opening up more possibilities for M&A.
To help our semiconductor manufacturing customers. Model N organized a special panel at Rainmaker23 – our customer and industry expert conference, held in Nashville in June 2023 – to focus on how to successfully complete M&As. The panel was headed by Model N’s Chanan Greenberg, senior vice president of corporate strategy, who was joined by Gregg Albert, global managing director of M&A strategy at Accenture; Bryan Tallman, vice president of revenue strategy and operations at Analog Devices; Sarah Morgan, corporate vice president of global business management and operations at AMD; Jennie Susanto, vice president of global sales operations at Renesas.
In this blog, we’ll share the topics and insights derived from the discussions with these industry leaders, including how to address the operational challenges of bringing companies together and how revenue management platforms can help.
The operational challenges of merging two organizations
Mergers and acquisitions (M&A) in the semiconductor industry come with a unique set of operational and strategic challenges. While the need to get regulatory approval due to antitrust and national security concerns is an obvious hurdle, there are often overlooked factors that can significantly impact the union, including building a common vocabulary, selling to customers as one entity, and merging technologies.
Take the word “revenue” as an example. As one of the panelists points out, the definition and meaning of this word could be completely different between the two merging entities. Many have experienced the need to change talking about revenue as taking revenue on shipment vs. looking at sell-through. However, this perspective is not consistent across every semiconductor or component manufacturer.
Acronyms, a highly popular convention in the high-tech space, can become a major negotiation source. Eventually, someone needs to make a call, document the changes to ensure consistent adoption, educate the entire workforce on the new conventions, and implement the changes in the systems.
Another challenge is selling to customers as a new, joined entity. The panel recommends implementing cross-functional, cross-product training as soon as possible to avoid business disruptions and ensure the customer experience is not impacted by internal changes. Technical training, product knowledge, and cross-selling of the two new portfolios must be carefully packed to ensure a smooth selling process for the internal teams. In addition, pairing salespeople with technical experts with a better understanding of the technology will set up your sales process and customer experience for success.
Then, there’s the system integration challenge. One company acquired two other entities within a four-year span, and many of the products were transacted in different systems for years, creating operational and reporting challenges. Eventually, everyone was moved to the Model N platform, which untied the businesses and empowered the employees while presenting a single source for channel insights to the business as a whole.
Additionally, uniting everyone on a single platform could uncover overlapping or redundant distributors between the companies. Having visibility will create a dialogue and enable everyone to choose the right partners.
How do you meet these challenges?
The panel agreed that addressing those challenges came down to three strategies: Depend on data, adopt a customer-centric mindset, and align your accounts.
Depend on data
Data becomes a critical factor for many reasons. For example, as you unite the businesses and adjust the policies, practices, and culture, emotions can run high. Change is never easy, after all. But if the changes and the decisions are grounded in data, and the information is properly communicated, people will be more open and accepting of the new path forward.
Establishing high-level key performance indicators is necessary to ensure revenue synergies are met across the combined portfolio. Measuring cross-selling, combination selling, and new customer acquisitions every month can help you understand the long-term strategy of your new portfolio early on.
Uniting platforms and data becomes a crucial factor in achieving a clean and trustworthy data story.
What do your customers want
Another obvious thing that semiconductor manufacturers should do – that many unfortunately don’t – is to get their customers involved. This is especially useful when you have a long close window. You may have publicly announced the deal, but you haven’t closed yet. It’s the perfect time to co-create how the new commercial relationship works by having discussions with your customers – if you can, from C-suite to C-suite for the most critical issues.
By engaging with customers through customer advocacy initiatives or 1×1 discussions, you can learn how to better position, package, and sell your new portfolio of products. You may also uncover new uses and opportunities through these conversations. And while you are getting a lot of helpful information for your business, you are also establishing trust and reducing friction with your customer base.
Sales compensation plans and account management are especially sensitive topics. If you build on the acquiring company’s way of doing things, you’re going to have a lot of people who feel that the rug is being pulled out from under them. It’s important in such cases to put strong change management controls in place and recognize that it might always be a point of contention.
How revenue management software can help
Revenue management software can help address several challenges during a merger and acquisition (M&A), particularly related to revenue forecasting, contract management, pricing strategies, and customer relationship management. Here are some specific ways the right revenue management software can help:
- Revenue forecasting: Mergers often mean integrating multiple revenue streams and databases that reside in incompatible formats. Revenue management software can help standardize and consolidate this data. Leading revenue management solutions can also dynamically adjust revenue projections as new information becomes available, allowing the newly formed entity to better manage expectations and performance metrics.
- Pricing: Revenue management software can analyze historical data to help the company set optimal pricing for products. It can also help model and manage volume-based pricing, a common practice in the semiconductor industry, and help the newly merged entity identify the best strategies for different customer segments.
- Contract management: Contracts with suppliers and customers will need to be renegotiated or integrated. Revenue management software can automate renewal reminders. Also, industries like semiconductors that have complex sales cycles and delivery timelines require recognizing revenue accurately. Revenue management software helps align revenue recognition with the actual delivery of goods and milestones achieved. This is critical during mergers and acquisitions since accounting practices between the two original companies may differ.
- Customer relationship management: Post-merger, there’s a risk of losing customers due to service disruptions or changes in terms. Revenue management software can identify high-value customers who should be prioritized during the integration process. By analyzing historical data, the software can also predict which customers are most likely to churn, allowing you to take preemptive action.
- Vendor and partner relationships: Revenue management software can provide data-driven insights that can be leveraged during negotiations.
By addressing these challenges, revenue management software can make the M&A process smoother and increase the likelihood of achieving the desired synergies and efficiencies.
Conclusion: Start with curiosity & right tools
The right attitude to have when attempting to merge two organizations is curiosity, the panelists agree. “Smart organizations aren’t just going to say ‘conform to what we do.’ They’re going to be saying, ‘We want to build a better company together, so let’s talk about it,’” said one panelist.
The panelists also agree that the right revenue management solution is key. Selecting an end-to-end solution makes it easy to account for unknowns and enables scaling, making change management and education the toughest part of this process.
For more information about how Model N can ease M&A closing, visit https://modeln.com/services-support/expert-services/