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

Buyer’s
Remorse
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ZIP Pointe©
Using analytics to mitigate M&A risk

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?
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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?

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.

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’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;
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:
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; “What went
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?”

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?
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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?

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
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.

Acquisition
customer base
skewed towards
smaller, not
larger sites.
Hence, total
Other Firmographic Segments
73% of acquisition
customers sites with
< 50 employees.
spend potential
(revenue) also
skewed in
wrong direction.
Moreover, West
coast is the
acquisition’s
least penetrated
region.

On average, new customer
Info sites (w/ 50+ employees)
could spend $2.3m on
software.
Opportunity Spend
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.

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.
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.

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, 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
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©.

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:
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

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:
Contact: info@kddanalytics.com
For more information:
Contact: info@kddanalytics.com

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

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