buyer's remorse - using analytics to mitigate m&a risk

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ZIP Pointe©

Buyer’s Remorse

Using analytics to mitigate M&A risk

ZIP Pointe©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?

� 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?

ZIP Pointe©3ZIP Pointe©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 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.


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.

� 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.


Strategy: Acquire Growth

� Investment banker recommends leveraging LMK’sstrong balance sheet through acquisition of a competitor who:

� Is highly penetrated among the high software spending verticals of 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.


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:� 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.


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;

� 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?”

ZIP Pointe©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?� 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?


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.

LMK Software Acquisition

Target

Verticals

Substantial

overlap

Reads: 2.7% of LMK’scustomers are in the Finance vertical, less than the US market

share (6.4%).

New territory for LMK but

vertical is not a terribly big spender on software.

Verticals



Acquisition customer base

skewed towards smaller, not

larger sites.

Hence, total spend potential (revenue) also

skewed in wrong direction.

Moreover, West coast is the acquisition’s

least penetrated region.

Other Firmographic Segments73% of acquisition

customers sites with < 50

employees.


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.


On average, new customer Info sites (w/ 50+ employees)

could spend $2.3m on software.

Opportunity Spend


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….

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.”

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.

LMK is not penetrated at all in possibly very lucrative segments.


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).

� 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.


Avoiding Buyer’s Remorse

� The customer analysis performed by KDD Analytics, 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 basic firmographics appended), could have been performed:� fairly quickly (~2 weeks);

� very cost effectively;

� by LMK (if they so chose) on their desktops;

� using ZIP Pointe©.


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©’s foundational data are:� Based on US Census, ZIP Code level 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.

� And can be integrated with customer level data via key firmographics.


ZIP Pointe©

� ZIP Pointe© is offered as a SaaS on an annual subscription basis:

� With the inclusion of default customer dashboards the base subscription price is $2,999 per user (client-specific, customized dashboards would increase the subscription price depending on their extent and complexity)

� Each request for the integration of customer data is charged separately, the one time charge depending on the complexity of the integration (i.e. whether firmographics would need to be appended to the customer file)

� In the case of LMK, assuming firmographic appending, a ZIPPointe©analysis likely would have cost < $10k.


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

For more information:

Visit: www.kddanalytics.com/zippointe.html

Case Studies: www.slideshare.net/kddanlytics

Contact: [email protected]

For more information:

Visit: www.kddanalytics.com/zippointe.html

Case Studies: www.slideshare.net/kddanlytics

Contact: [email protected]

buyer's remorse - using analytics to mitigate m&a risk

Business

new customers

acquisition help lmk

size of lmk

customer business sites

customer share

theacquired customer

customer profiles

existing customer base