Speaker A
Hey guys. So, this next drill is about the merger of two large software providers. Actually, one really large one, Oracle, and another one that's hypothetical, SoftSales.
Explore hypothesis testing in a software M&A case between Oracle and SoftSales, focusing on strategic decision-making and competitive analysis.
Key Takeaways
- Hypothesis testing is crucial in evaluating M&A decisions beyond initial frameworks.
- Structuring hypotheses into cause, effect, and consequence simplifies analysis and testing.
- Rapid market share growth by a target company can justify acquisition over in-house development.
- Differences in software style and developer efficiency impact the cost and feasibility of internal development.
- Specialist insights and data on growth rates and development timelines are essential for informed decisions.
What the video covers
- The video presents a case drill about Oracle considering acquiring SoftSales, a growing cloud-based CRM software company.
- The focus is on hypothesis testing rather than providing a full framework answer.
- Key hypotheses include whether Oracle should buy SoftSales or develop similar software in-house.
- Hypotheses are structured into cause, effect, and consequence for clarity.
- Main hypotheses: SoftSales is rapidly capturing market share, making competition difficult; SoftSales software style is unique and efficient, making in-house development costly or inferior.
- Testing involves estimating development time, analyzing SoftSales’ client growth rate, and evaluating software development efficiency and market requirements.
- The video discusses factors like switching costs, poaching developers, and product differentiation.
- It emphasizes the importance of specialist input and benchmarking for accurate estimations.
- The drill teaches how to structure and test hypotheses in a consulting case interview context.
- The instructor encourages viewers to apply these methods for clearer, more effective case analysis.
Chapters
- 00:00Introduction to the M&A Drill
- 00:30Case Question and Focus on Hypothesis Testing
- 00:57Overview of SoftSales and Oracle's Consideration
- 01:17Setting the Framework and Hypothesis Testing Question
- 01:41Formulating Hypotheses: Cause, Effect, Consequence
- 03:12Detailed Hypotheses on Market Share and Software Quality
- 04:04Testing Hypotheses: Development Time and Market Growth
- 05:27Evaluating Software Style, Developer Efficiency, and Poaching
- 07:07Summary and Final Advice
Full Transcript — Download SRT & Markdown
Speaker A
Okay? So, let's get to it. I'll show you the framework question, and then you can come up with your answer for it, and then move on to the hypothesis testing question. Again, I'm not going to show you my framework answer because this is
Speaker A
not the point of this drill. The point of this drill is hypothesis testing. So, here's our case question.
Speaker A
Oracle, a giant multinational computer technology corporation specialized in developing and marketing enterprise software solutions such as ERP software, CRM software, and SCM software, which are enterprise resource planning, customer relationship management, and supply chain management. They are currently considering acquiring a
Speaker A
rapidly growing medium software company called SoftSales that has one main product, a cloud-based CRM software.
Speaker A
How would you help them with that decision? Now, before we move on, I want to remark that this software that they have made is really successful, is really helping out clients, and that's why they're gaining a lot of market share.
Speaker A
So, should Oracle buy SoftSales? So, once you have your framework set, let's move on to the hypothesis testing question.
Speaker A
So, in this case, you said at some point during your framework presentation, I need to test whether it would make sense for Oracle to buy SoftSales for their software versus developing its own similar product. Then, at that moment,
Speaker A
the interviewer interrupted you. That's interesting. How would you figure that out? So, you have to stop your framework question. You got to your framework answer, and you got to ask and you got to answer the interviewer's question.
Speaker A
And now, again, like before, I'm going to clear my thoughts by structuring my hypothesis into a cause and effect and a consequence. Now, in this case, there's a lot happening, okay? So, we could need it could make sense for us to buy
Speaker A
them for their software versus developing it because it would be cheaper, because it would be better software, or because they're conquering, they're capturing market share so fast that it would be hard to compete if we waited
Speaker A
too long. And that too long would mean the time to develop a similar software. So, let me structure that. The cause first cause here, which is the most likely for the most likely hypothesis, is SoftSales
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is rapidly, rapidly capturing market share with their product. The effect of this is in the development time, SoftSales will have captured a large chunk of market share. And as a consequence, it would be too hard to compete even
Speaker A
with a similar product after they have a large client base. I'm assuming, of course, that the switching costs are high, which they usually are for enterprise systems. If for some reason in this new different product that they have, it's not, everything
Speaker A
changes, okay? Now, other hypotheses that are important here is our SoftSales software style is much appreciated by the market and is very different from what Oracle's used to make. And that is a necessary assumption for it being more expensive
Speaker A
for us to develop or for it being bad for their software to be necessarily better. So, one of those. SoftSales devs are more efficient in developing that style of software and are hard to poach, so I can't just hire them.
Speaker A
Or SoftSales devs are much better at developing that kind of software. All right? And it would be too costly to develop a similar product in-house.
Speaker A
That's the consequence of the second hypothesis, and the consequence of the third is a similar product developed in-house would be significantly worse. So, I get two main hypotheses out of this.
Speaker A
They are SoftSales is capturing market share too quickly, it would be harder to compete with them once they have a large customer base. So, it's not worth the wait to develop in-house. Or else, SoftSales is much better or more
Speaker A
efficient in making that style of software, and competing with a different one would not be competitive. So, developing in-house would be either too costly or quality would not be acceptable. Okay? Now, let's test those two or three hypotheses. Now that I have
Speaker A
them structured into cause, effect, and consequence, it's much simpler for me to test. All right, so the first one is SoftSales is capturing share too quickly, second one in-house development would be too costly, and third one software
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developed in-house would not be competitive. So, for the first one, first thing I want to know is how long it would take us to develop that kind of software. And to find that out, I'd probably just simply estimate
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with specialists. I might want to divide the project into phases and estimate time for each phase, but I'm definitely going to need a specialist to help me with that. If I need to, I'd benchmark that with other projects that I've done
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in-house and add an extra time or percentage of extra time in specific phases due to the style of the software being much different, if it is. Okay?
Speaker A
Next, I need to know how fast SoftSales have been capturing clients, and by how much they could increase pace, especially if they got additional funding. So, to look at the first question, I'd try to understand the history of growth in
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number of clients per month, and that would help me understand, have a perspective in the future. And of course, how that growth rate has been changing. And I'd need to estimate their pace increased
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given potential funding. So, they could increase sales force if they have additional funding, and that would make them grow much quicker if their product is so good. All right?
Speaker A
Next, to find out if in-house development would be too costly, I'd first and especially need to know that SoftSales devs are much more efficient in that style of software. If that's true, I'd also need to know if the style of software is
Speaker A
different than what Oracle makes. If it's not different, then this is not an issue.
Speaker A
That style of software is required to compete because if it's different, but we can't do it in another style that we're used to, and that would be fine with the market, then well, that's not really a problem. And it's not possible to poach
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main devs. So, if the style is different, the style is different, and that style is also required by the market, I can always poach the main devs and have them work for me, and then it would still be
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I would still have their efficiency. So, if I can't poach them, well, in-house development would be too costly.
Speaker A
And to find out if software developed in-house would not be competitive, it's pretty much the same three last tests, but instead of knowing if software sales devs are much more efficient, I need to know if they are more qualified in that
Speaker A
style of software. And the next tests are the same, I've done them already. Okay? This is how I test this. You could have put the two last hypotheses together, that would be fine, too. I chose to separate them because it makes
Speaker A
everything clearer to me. Okay? All right. I hope this helped you, and I see you in the next one.
Topics:case interviewhypothesis testingmerger and acquisitionenterprise softwareOracleSoftSalesCRM softwaresoftware developmentmarket shareconsulting case
