Buyer's Remorse - Using analytics to mitigate M&A risk

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Buying growth? Make sure you get what you pay for.

Use analytics to answer, during due diligence:

> Sales penetration and addressable market by industry, company size, territory?
> Revenue growth opportunity? by industry, company size, territory?
> Potentials sales organization redundancy (cost savings)?
> True value of the deal?

You’re about to spend millions on a deal…isn’t this information worth a few weeks & less than $10,000?

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Buyer's Remorse - Using analytics to mitigate M&A risk

  1. 1. Buyer’s Remorse Click to edit Master subtitle style ZIP Pointe© Using analytics to mitigate M&A risk
  2. 2. Buying growth? Make sure you get what you pay for Use analytics to answer, during due diligence: Sales penetration and addressable market by industry, company size, territory? Revenue growth opportunity? by industry, company size, territory? ZIP Pointe© 2 size, territory? Potentials sales organization redundancy (cost savings)? True value of the deal? You’re about to spend millions on a deal…isn’t this information worth a few weeks & less than $10,000? You’re about to spend millions on a deal…isn’t this information worth a few weeks & less than $10,000?
  3. 3. Less than ideal picture M&A due diligence may not always lead to a complete view of an acquisition target: Typically, reliance is made on personnel interviews, financial/corporate/legal statements/documents/worksheets, 3rd party aggregate market-level competitive analysis, forecasts, etc; And a “high-level” view of customers – account name, historical and current annual sales, etc. Much less typical is a deep dive into the acquisition target’s customer ZIP Pointe© 3ZIP Pointe© 3 Much less typical is a deep dive into the acquisition target’s customer base, focusing on: Customer profiles, market segmentation/penetration and market potential/opportunity…all at a granular level (geography, industry (vertical), business size, etc); Particularly in comparison with the existing customer base. Such an incomplete view can lead to “buyer’s remorse” What follows is a an example of a post-acquisition analysis which revealed the acquired customer base not to be as expected.
  4. 4. Use Case: LMK Software Financial management software (SaaS) vendor Product helps businesses better manage their accounting and financial records and is geared toward business locations with 10+ employees. Within 3 years, had amassed ~65k customer business locations throughout the US. ZIP Pointe© 4ZIP Pointe© 4 Management believed it had strong penetration in health and manufacturing verticals, was weak in the Western US and should be much stronger with mid-market sized customers (50+ employees). But growth has been stagnant over the last 1-2 years: Net renewals have been flat; Word from sales of several new competitors in the market.
  5. 5. Strategy: Acquire Growth Investment banker recommends leveraging LMK’s strong balance sheet through acquisition of a competitor who: Is highly penetrated among the high software spending verticals of Finance, Info, Utilities and Management; ZIP Pointe© 5ZIP Pointe© 5 Finance, Info, Utilities and Management; Is highly penetrated among larger sites (e.g. 50+ employees); Is strong on the West coast (to better serve the CA and WA markets). Objective would be to move the majority of acquisition customers to the LMK offering.
  6. 6. Target Acquired Based on discussions with key personnel/sales staff and on available data, negotiations focused on one competitor that appeared to satisfy the key requirements. Competitor was about ½ the size of LMK: ZIP Pointe© 6ZIP Pointe© 6 Competitor was about ½ the size of LMK: About 30k customer business sites 30 employees Product offering similar but less sophisticated than LMK’s and offered at a somewhat lower price point Both the investment banker and the target used a revenue multiple to support a price of $10 million. Both the investment banker and the target used a revenue multiple to support a price of $10 million.
  7. 7. One year later…CEO not happy Although acquisition went smoothly, results were not as expected: Sales of flagship LMK offering did not take off; Seemed to be more redundancy in sales teams than expected; “What went ZIP Pointe© 7ZIP Pointe© 7 teams than expected; More resistance to LMK offering among acquisition customers than expected. KDD Analytics was retained to help LMK better understand its customer base and market opportunity….this is what they found….. “What went wrong?”
  8. 8. Analytics road map LMK customer base vs. newly acquired customer base: Are the new customers in the desired verticals? Are the new customers in the desired market (i.e. 50+ employees)? Are the new customers strongly represented in the Western US? ZIP Pointe© 8 in the Western US? Are the new customers in new, high opportunity segments? And, to the crux of the issue…. What is the $ market opportunity for LMK’s product in specific geographic markets and verticals? And did the acquisition help LMK penetrate these markets? And, to the crux of the issue…. What is the $ market opportunity for LMK’s product in specific geographic markets and verticals? And did the acquisition help LMK penetrate these markets?
  9. 9. LMK Software Acquisition Target Verticals Substantial overlap Reads: 2.7% of LMK’s customers are in the Finance vertical, less than the US market share (6.4%). Verticals ZIP Pointe© 9ZIP Pointe© 9 Though the acquisition expanded coverage in Transport and somewhat in Utilities, it did not appreciably expand coverage in the desired verticals of Finance, Information and Management…in fact 27% of the acquisition customer base (Manufacturing) overlapped with LMK’s 23% customer share in Manufacturing. New territory for LMK but vertical is not a terribly big spender on software.
  10. 10. LMK Software Acquisition Acquisition customer base skewed towards smaller, not larger sites. Hence, total Other Firmographic Segments 73% of acquisition customers sites with < 50 employees. ZIP Pointe© 10ZIP Pointe© 10 spend potential (revenue) also skewed in wrong direction. Moreover, West coast is the acquisition’s least penetrated region.
  11. 11. LMK Software Acquisition On average, new customer Info sites (w/ 50+ employees) could spend $2.3m on software. Opportunity Spend ZIP Pointe© 11ZIP Pointe© 11 Defining “opportunity spend” as the difference between market spend and potential spend by current customers (among sites with 50+ employees), the charts show essentially the same ranking and dollars “left on the table” => the acquisition did not contribute in a meaningful way to penetrating these high valued verticals and segments.
  12. 12. Focusing on LMK’s opportunity in the Information vertical on the West coast reveals where the opportunity lies and, hence, the desire for a stronger presence in this region…. On average, new customer Info sites w/ 50+ employees in the West could spend $2.7m on software. In the Silicon Valley, such new customer sites could spend up to $6.5m, on average, on software. ZIP Pointe© 12ZIP Pointe© 12 The CEO was heard to exclaim as she walked back to her office after this presentation by KDD Analytics… “If we had known this beforehand we never would have made the acquisition.” LMK is not penetrated at all in possibly very lucrative segments.
  13. 13. Implications Although able to remove a competitor from the market, the $10 million “cost” did not get LMK into the segments they were desiring; Nor were “new customers” really customers for LMK’s flagship offering (e.g. 35% were < 10 employee sites). ZIP Pointe© 13ZIP Pointe© 13 LMK was forced to support the acquisitions’ product to a much greater extent than expected, rather than replacing or integrating with LMK’s flagship offering and shedding some of the acquisition's workforce; And thus had to carry a much larger share of the acquisitions' operating cost than expected.
  14. 14. Avoiding Buyer’s Remorse The customer analysis, if done during the due diligence process, could have alerted LMK to the pitfalls of the acquisition. The analysis, once the data were assembled (current and acquisition customer records with ZIP Pointe© 14ZIP Pointe© 14 The analysis, once the data were assembled (current and acquisition customer records with basic firmographics appended), could have been performed: fairly quickly (~2 weeks); very cost effectively (< $10k); by LMK (if they so chose) on their desktops; using ZIP Pointe©.
  15. 15. ZIP Pointe© The analysis and visuals used in this presentation were taken from ZIP Pointe©, a set of Tableau driven dashboards designed to help the user: Analyze and segment markets across the US; Profile existing (and potential) customers; Determine pockets of market opportunity; Track performance during integration after closing. ZIP Pointe© 15ZIP Pointe© 15 ZIP Pointe©’s foundational data are: US Census, ZIP Code business data, down to the 6-digit NAICS level; Enhanced with estimates of revenue (total, e-commerce), payroll and various measures of potential spend (e.g. IT spend on computers, software, etc); Custom potential spend estimates are possible using actual customer sales data. Integrated with customer level data. ZIP Pointe© is offered as a SaaS on an annual subscription basis
  16. 16. ZIP Pointe© “Don’t take anyone’s word on it…Quantify the characteristics of the acquisition customer base before the sale so you know what you are getting into.” --- CEO, LMK Software ZIP Pointe© 16ZIP Pointe© 16 For more information: Contact: info@kddanalytics.com For more information: Contact: info@kddanalytics.com

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