Don’t Get Blindsided Integrating a SaaS Company

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Don’t Get Blindsided Integrating a SaaS Company

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Programmatic mergers and acquisitions (M&A) are a critical element of startup growth, as shown in McKinsey’s previous work “grow fast or die slow.” Most top performing SaaS companies need to extend growth by bulking up their product portfolio, bookings growth, market share, TAM, or talent and technology stack. Shareholder return-based studies suggest that programmatic M&A leads to above average outcomes versus other M&A approaches.

Some SaaS companies have built strong M&A capabilities in this arena to become successful programmatic acquirers. If you look deeper at what top performing companies believe really separates the lowest and highest performers in M&A value capture, it is their ability to do “integration planning and execution,” as noted by the largest delta in the graphic below:

Global M&A Capability Building Survey, 2015. The online survey garnered 1,841 responses from C-level and senior executives.

Contemplating their first major acquisition can be a very stressful experience for a SaaS company CFO and/or CEO. Aside from whether it is the right target, or whether to proceed now versus later, or if the price is right – a big driver of success hinges on how well integration planning and execution is done. Yet many SaaS companies have no M&A team in place, so they are left scrambling to estimate the budget for integration efforts and activities, which can be hard to predict and plan for, much less having the capabilities and capacity to get the integration done.

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At Fuel, we find a common concern among SaaS companies is how much to budget for post-merger integration costs after that first big acquisition. These costs represent the one-time, non-recurring costs that companies will spend to rationally blend products, sales processes, operations, marketing efforts, brand, people, cultures, systems, and tools.  These are not the one-time transaction costs for the deal that sell-side investment bankers, M&A lawyers, and financial due diligence accountants earn.  These are the expenses borne both by internal employees and 3rd party consultants.

In order to better understand these costs, the Fuel team conducted an analysis on buy-side M&A deals in the SaaS industry. We reviewed 24 deals where the data was publicly available to calculate the implied one-time, non-recurring acquisition integration costs as a function of (1) acquired headcount and (2) purchase price paid.

Our analysis estimates that public SaaS companies will spend between:

  • “Per capita”basis: ~$18 to 33k per acquired FTE in one-time, non-recurring acquisition integration costs
  • “Deal value” basis: ~1.5 to 2.1% of the purchase price on one-time, non-recurring integration costs

For example: If a SaaS company is acquiring a startup with 70 full-time employees, our model estimates it would likely pay between $1.3 and $2.3 million in one-time, non-recurring costs to integrate the company on a “per capita” basis. On a deal value basis, a $300m acquisition implies a SaaS acquirer will spend between $4.5 and $6.4m for one-time, non-recurring integration costs.“Having a clearer idea of the true costs of integration should give SaaS leaders the sense of what value needs to be captured from a deal. ”

Having a clearer idea of the true cost ccs of integration should give SaaS leaders the sense of what value needs to be captured from a deal.

The $3-4m difference between ‘per capita’ and ‘deal value’ costs is because we used SaaS historical deal data to approximate the actual costs, so these estimates are via a calibration method. True costs will vary based on other factors: the negotiated purchase price, or if you have a full-time M&A integration team in house (where these costs are already baked into your recurring operating expenses). See the table below for an idea of the ranges within the companies we analyzed:

Source: Fuel, A McKinsey Company analysis of public data from 24 buy-side M&A deals in the SaaS industry between 01/2014 and 05/2018

Effective M&A integration can be challenging. It is wise for SaaS CFOs to budget on the higher-end of this spectrum for their first acquisition. Mistakes will be made. Hidden costs will emerge. But once muscle memory is developed from a few acquisitions and some scale, you can and should move down to the lower end of the integration cost spectrum.

Having a better understanding of the expected costs of integration, based on publicly disclosed, historical cost from past acquisitions in SaaS, will give C-level leaders the confidence to set aside adequate budget to ensure the proper resources are in place to achieve successful integration and to capture their fair share of benefits and value creation inherent in the acquisition.

Email Junaid or Oleg if you have any questions or want to discuss this article further. And follow Fuel on Twitter and LinkedIn for more SaaS insights.

About the Authors

Oleg Pynda Headshot

Oleg Pynda

Research Science Analyst

Oleg is Fuel by McKinsey’s Research Science Analyst.

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Junaid Mohiuddin Headshot

Junaid Mohiuddin

West Coast Market Lead

Junaid leads our SaaS practice and helps startups grow their enterprise value.

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