If you buy into a company with an existing income stream it’s fairly easy to hollow it out, cut back on costs and continue to pick up the revenue stream; thereby turning it into a great company from the point of view of the accountants.
It turns out it’s much harder to take the same business and ensure that it becomes high-growth and profitable. While this is the most sustainable approach in the long term, in the short term it won’t make you much money – and here’s why.
The companies that make money aren’t necessarily the good ones, but as an investor, customer or partner you might not discover that until products begin to fall behind the competition and customer attrition starts to climb.
Over the last 15 years CargoWise has acquired more than 10 different companies, and most recently TransLogix has been added to the WiseTechGlobal group, parent company of CargoWise.
While some of these companies will continue to operate as separate groups under the WiseTechGlobal group, they are all integrated into a single approach to software sales and development.
We integrate staff into our team culture, invest in product development, create deeper product features, and build more powerful capabilities, while also focusing on the customer transition. The idea is to keep on investing and innovating to ensure that the software remains at the cutting edge.
So no, the acquisition might not provide an immediate boost to revenues while we hollow out the acquisition, because we don’t intend to hollow it out at all.
But this approach doesn’t make sense from point of view of the “ChainSaw Al” financial and legal types who are often left in charge of acquisitions process. They will tell you to cut staff, combine back-office functions, and increase license and services costs. But they won’t advise you to invest in the future or to focus on value, because doing so will add to your costs and decrease your revenue growth in the short term. If you follow the “ChainSaw Al’s” your revenues will increase and the CEO will look terribly clever - at least in the short term. That same clever CEO will get out of the company just after the record earnings report and just before the inevitable fall.
It’s much harder to create and run an innovative software company than it is to continually buy smaller software companies and operate off their ongoing revenues - which is the approach being adopted by many of our competitors. They’ve become very good at buying companies, and it’s a strategy which will keep on working until they either run out of money and customers, or their business becomes such a complex patchwork quilt of technologies that it stalls and becomes what the private equity community call “the walking dead”.
When we buy a company its people and products become part of CargoWise; the software is integrated into our platform, and the developers, sales staff and product specialists are integrated into our team. More importantly we continue to invest in the culture, innovation and cores values needed to ensure the product continues to improve, even if it means reinvesting the profits and looking to build the business for the long term.
Because we’re not looking to just make money – we innovate and make great software.
Richard White is CEO and Founder of CargoWise®