Upcoming Microsoft incentive changes will have played a critical role in SoftwareOne and Crayon’s $1.4bn mega-union, analysts and industry experts have told IT Channel Oxygen.
As recently as January, SoftwareOne snubbed a third takeover approach from Bain Capital, with then CEO Brian Duffy saying it was “confident of its positioning in a large and fast-growing market”.
But in the intervening 11 months, SoftwareOne’s demeanour has turned from cheery to chastened.
Duffy – along with most of the SoftwareOne board – has left the business, its shares have lost 60% of their value over the last 18 months, growth has slowed, and a sales restructure is underway.
Was Microsoft behind it all?
So what changed? And why is it now acquiring one of its closest peers?
While strategic missteps and the internal squabbling won’t have helped, analysts and onlookers all say impending Microsoft partner incentive changes will also have played an important – and perhaps decisive – role in SoftwareOne’s thinking.
On an earnings call yesterday, Crayon CEO Melissa Mulholland revealed that Microsoft would account for around 70% of the combined company’s revenues (as if to reinforce just how central Microsoft is to its business, a Microsoft exec was even quoted in the press release).
But with the software giant gearing up to slash EA incentives for LSPs and move them into other areas such as CSP (see here, here and here), SoftwareOne may have felt somewhat exposed.
On yesterday’s call, Mulholland talked up the strength of Crayon’s burgeoning CSP business, saying it “will continue to be a strength, especially in regards to the changes Microsoft are making”.
When we asked three analysts/licensing industry experts for their spin on the deal, it is telling that Microsoft was at the forefront of each of their responses…
Alex Smith, VP, Channels Research & Practice Operations VP, The Futurum Group
“Both SoftwareOne and Crayon are big Microsoft partners, and I believe a big factor in this acquisition is about driving scale and profitability in that practice. The reality for partners facing resell margin pressures is they need to scale, or they need to invest in real high value services. This announcement is more about driving scale, and they have already pointed to the potential cost synergies from this deal.
“The fact that Microsoft’s top partner executive, Judson Althoff, was quoted in the official press release suggests that Microsoft was being briefed of the plans and that their stated confidence on the combination would help ensure that all shareholders would get behind the sale. In years past, a vendor might feel disadvantaged to see some of its top partners coming together. But the reality is that Microsoft is a juggernaut and if anything, will probably derive some efficiencies from having a small number of larger partner to work with.”
Rich Gibbons, Head of ITAM Market Development & Engagement, Synyega
“Microsoft’s announced reductions in available rebates for LSPs, and the announcement of certain EAs being taken direct/pushed to CSP, have certainly shaken things up for many in the channel as they stand to lose thousands of £ per customer.
“SW1 and Crayon coming together may well be a reaction to that as they look for new customers, new revenue streams, and new ways to streamline internal costs.
“Customers must always be aware of M&A activity between their suppliers, as any uncertainty and confusion is likely to impact them. Will service levels drop? Will processes change? Will they lose their favourite account manager etc.”
Alastair Edwards, Chief Analyst at Canalys
“A massive 70% of the joint business is linked to Microsoft (through sales and services), highlighting both its strategic relationship but also potential risk, particularly as Microsoft continues to change its go-to-market strategy and incentives.
“The deal reflects mounting pressure on Swiss-quoted SoftwareOne in the face of weakening sales and profits, poor internal execution and cuts to Microsoft incentives. It has been slower than key competitors – including Crayon – to adapt to changing industry dynamics and hampered by internal disagreements about its future direction.
“A key question is whether combining the two companies will ultimately resolve SoftwareOne’s underlying issues. SoftwareOne has fallen behind its major peers, such as Insight, CDW, Presidio and Advania, which have focused their M&A investments on specialist, high-value acquisitions, building services expertise in high-growth technologies, such as cloud and AI, or specific vendor practices, such as ServiceNow, AWS and Google Cloud. This has helped accelerate their transformation and enhance customer relevance. SoftwareOne has made a small number of targeted acquisitions in the last 24 months, including cloud application provider Medalsoft to expand its reach in mainland China, and Spanish SAP migration specialist Novis Euforia. But it needs to urgently accelerate this M&A strategy to break out of the trap of scale consolidation. A successful merger would see the company 30% smaller in revenue in five years but more profitable, measured in service multipliers not margins.”
