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The Hidden Value of Code Documentation: A Success Factor for M&A

Tech acquisitions in 2020 reached an astonishing value of $603 billion dollars, and 2021 doesn’t seem to be moving at a slower pace. While these M&As create a sense of optimism in tech’s ability to digitally transform industries after COVID-19, the question arises: what happens next?

The answer to that question will depend a lot on how these newly-formed companies will deal with code: how they will preserve it and how they will make sure it is used properly to deliver on the promise of these acquisitions. One of the best solutions they can find is code documentation. Let’s see why.

The Value of Code Knowledge in M&As

Companies acquire other tech companies for their customer base, code or talent. While sometimes the acquired company keeps operating as an autonomous unit, more often than not a technological integration is required. In either case, companies invest huge amounts of resources in retaining developer talent, through bonuses, retention plans and raises. This is intended to ensure that the tribal code knowledge doesn’t leave the company.

Code knowledge retention in an M&A setting is critical for a number of reasons:

Maintenance: First, code knowledge retention is important to keep developing and maintaining the product itself. If the developers who understand the data flow and how the different code components interact with each other leave, it will be very difficult to keep the product alive. Or at least, it will take a lot of time and resources to get it up and running again. According to a survey we conducted here at Swimm, it takes an average of 3-9 months for developers to fully ramp up.

Integrations: If the two companies are integrating their products, it takes knowledge experts on both sides, who understand the bits and pieces as well as the overarching picture, to properly plan, design and execute the integration.

Hand-offs: If the acquiring company decides to take over the product completely, the code knowledge is required for onboarding the new development teams and handing over the keys.

While retention plans do work, they are costly, and they create a lot of overhead for the developers. Instead of developing new code, developers are spending their time on onboarding and training. In addition, overcoming physical distance, communication barriers and logistics challenges all take time and resources. This directly impacts time-to-market and the customer experience.

But it's not just the direct costs that are negatively affected. While these logistical nightmares training sessions are taking place, the investors’ confidence in the ability to deliver on the acquisition promise plummets, along with its value. This can have groundbreaking effects for companies.

According to McKinsey, successful acquirers are able to keep growing revenue in a pro forma form in the first year, to keep business momentum. Unsuccessful acquirers do not. In other words, while acquiring companies are spending resources on training developers to their newly-acquired code, their actions might be making their own efforts futile.

How can companies avoid the first year dip, which often predicts the success of the acquisition?

Increase Company Value with Code Documentation

Code documentation is a promising way to minimize M&A friction. The more documented the code, the easier it is to successfully merge. Documentation ensures product stability and enables the acquired company to govern the roadmap after the acquisition. With documentation, onboarding times are shortened, a developer leaving doesn't have such a momentous effect, and the acquiring company has full transparency into the ability to plan and predict integration costs.

In other words, documentation can actually raise the value of an acquired company. According to Gartner, IT cost optimization is a key component in a successful M&A. Therefore, when an acquiring company sees properly documented code, it knows that it will need less resources to merge and integrate the product. It might even be able to plan how many resources it will need.

This saved time is worth money, and entrepreneurs can leverage this as a way to boost the value of their company. In fact, they can even augment this time-saving value by demonstrating quantitatively how much more efficient documentation is making them.

When and How to Invest in Code Documentation for M&A

Code documentation helps companies grow efficiently. Therefore, any company aspiring to be acquired, aspiring to acquire or just planning on growing, should invest in documentation, from the get-go. If you haven’t yet, and you’re an entrepreneur with plans to be acquired, investing in documentation now can help gain a competitive advantage in the acquisition negotiation. Here’s how to get started.

As for acquiring companies, an acquired company with code documentation ensures seamless integrations and onboarding for your developer team. Therefore, enforcing code documentation as part of the acquisition terms could have considerable value.

Code Documentation in 2021

Lack of code documentation has an effect on the company’s value and the success rate of the integration. At the very least, documentation helps augment an acquired company’s value. If documentation is not implemented, it could and does slow down the speed of success, and might even be actually be tied to the M&A failure. With the growing number of tech acquisitions expected in 2021as well as 2022, it will be interesting to see how many of the successful acquisitions were enabled due to properly documented code. Our guess - quite a few.

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