At this writing, diminished business levels continue outside of a few resort areas. Hotels are limping along with reduced occupancy, rates, and staff . Everyone left is now doing multiple jobs, most involving cleaning and sanitization. The vendor community is also seeing staff reductions, fewer people doing more jobs and having its own serious conversations with lenders and investors.

This is all due to the steep and sudden drop of up to $75 billion in room revenue. When hotel revenue drops, there’s less to spend on employees, debt service, renovations and IT suppliers. As demand for travel products falls, the pain will continue to flow downstream. If it goes on long enough, long-term lack of revenue for both hotels and technology vendors will have consequences for both. The prospect of undercapitalized hotels changing hands, perhaps at a fraction of purchase price or replacement cost is real, with more than 23% of hotel loans 30 days or more delinquent in August 2020. We can assume those that return will do so under a flag, with lenders unwilling to rescue an asset that isn’t supported by a major distribution system.

What happens to technology vendors that don’t have the liquidity or access to new sources of liquidity to survive? Layoffs and furloughs will only go so far. A vendor partner without enough revenue and no access to cash that will keep them alive well into 2021 will face one of three scenarios:

• Go out of business
• Pivot to a different line of business or sector
• Get acquired by a company with more liquidity

“I think it is very likely we will see consolidation in the hotel technology space, perhaps especially in the PMS segment, where those with a differentiated product will stand out,” said Michael Yeomans, head of strategy and transformation at Amadeus Hospitality.

Other industry leaders agree. “We definitely will see vendors exposed by COVID and some will get acquired by someone at some price,” said Jason Floyd, senior vice president and general manager at Infor Hospitality Floyd. He adds that it isn’t only small vendors in play. “I don’t see any of the large global players selling out, but other vendors, ones without a solid global footprint are at risk. A strong global presence gives geographic diversity. Right now, North America is hurting. But Europe is ramping up. I’m not sure that more regionalized vendors of any size have the benefit of that diversity.” “I think that is a solid thesis,” said investor Ron Tarro, former CEO of SDD, Inc. “A well-funded startup is lucky to have 12-18 months of cash on hand. But the math on recovery for hospitality technology is more like 24-30 months, so many will have to do something.” Acquisition Criteria Most observers start an acquisition discussion with financials. They give more weight to projected future revenues and expenses than in the past.

Additional concerns include:‍

• Does the technology fit in with the buyer’s existing product portfolio and technology stack?
• Can the UX be aligned with existing products?
• Is there a people and culture fit?
• Will the acquired product(s) increase sales of those already in the portfolio?
• Will it accelerate time to market or open up segments the acquirer can’t readily tap otherwise now?

Investor Sean O’Neill, former CEO of Newmarket International, has considerable first-hand experience with both sides of mergers and acquisitions in hospitality technology. He recommends focusing on the customer base. Are there one or two customers at the brand level that make up a major portion of the installed base? If so, the acquirer must understand how solid those customer relationships are. “Brand relationships will become even more critical for vendors as the need for owners to source data security and data privacy capabilities from brands continues to escalate along with lenders pushing the new owners of foreclosed hotel assets to adopt a major flag,” O’Neill said.

Implications for Customers

If a vendor gets purchased, what are the implications for the hotel company customer base? Obviously, a lot depends on the new owner’s intent. If the goal is to add to an existing portfolio and use the broader offering to drive sales of all products, it will probably be beneficial. The new owner will possibly invest in software development, services and sales to a degree the prior company could not have. On the other hand, Tarro said, “If a smaller company gets folded into a larger company, what they could once do nimbly and efficiently now becomes a cross-functional exercise requiring layers of approval and lots of processes. Things go slower.”

But if the intent of the acquisition was simply to buy the installed base at a low price, there’s a risk users will migrate to another offering in the same product area as the new owner attempts to reduce costs by consolidating support and development organizations. This cuts both ways. The new owner doesn’t want to drive off those customers that were the reason it purchased the company in the first place.

Even if the intentions toward the new company, along with its staff and customers, are positive, substantial executional risk remains as the parent company imposes its processes for order entry, contracting and support. Customers will definitely pay the price for poor execution during the integration phase. (See sidebar: Now We Have to Make It Work.) One way to mitigate this risk is to not integrate operations, but rather to let the acquired company operate on its own, with previous support, development, sales and back office capabilities. This strategy isn’t cheap. It denies the new owner cost synergies from combining back office, development and support. The biggest cost may well be loss of incremental revenue for the rest of the product portfolio. Probably the worst outcome for customers is for the original vendor to go out of business altogether. That leaves the hotel with an orphan product and no buyer invested in keeping its clientele. This forces the hotelier to rush to market or otherwise find a replacement, with nowhere to turn for support in case of a problem. It’s safe to expect a meaningful amount of consolidation in the hospitality technology sector.

We’ll have to watch and see who the buyers and their targets are, then draw our own conclusions as to the underlying motivations of both – and whether or not they achieved their strategic objectives.