Scoping the acquisition target

BackChannel was asked to generate a report specifically designed to assist in valuing the of the acquisition target; by providing key information on their customers and the services they have bought. 2000 customers profiled, using Dedicated Access, Hosting, and Co-location.

Why go to these lengths?

• Being a privately held company there was uncertainty about the true position of the company (closed book accounts, “radio” silence policy on finances and direction)
• Strong rumours of stagnation; demoralised and shrinking sales organisation, less than 40 sales staff were employed at the start of the survey.
• Lack of market leadership and no outstanding, or “Killer” service offerings.
• Financially troubled (having de-listed from public to private company) the target provider was known to have liquidity issues having recently moved to invoice factoring
• Combined these factors indicated a likely closing window for the company to be acquired, or asset stripped
• …and yet… for years they maintained some strong core accounts a significant number of very loyal corporate customers including several banks, pharmaceuticals retailers and a national supermarket chain…

Methodology

Customers

The customer base from the January was re-examined. This differential analysis considered only Dedicated Access customers. At the clients request; Hosting, Co-location, and other kinds of customers were not part of this repeat survey. New data was collected in the July and the delta was examined.

Questions

The points of interest were in this short period; who churned & who stayed? Who disappeared completely? Who picked up the churning customers? Why did the churners leave? And why did the others stay?

Results – Headlines

Of 640 leased line customers at the start of the project 140 customers or Domains churned to an alternative provider.

476 customers were still with the acquisition target for their main Dedicated Access service.

24 customers Domains ‘disappeared’ as a result of brand consolidation, closures or mergers. Significantly; BackChannels’ research uncovered a higher than average rate of customer churn; 25% in just 6 months.

 

Results – Q & A

Who churned and who stayed?

Unsurprisingly larger customers stayed, while smaller ones were most likely to churn. There were notable exceptions to this rule, two of the historically loyal banking customers had gone. Other headline accounts had been rescued by early intervention by the acquiring company who made the decision to approach the customers to reveal there intended acquisition of the company.

Who picked up the churning customers?

Nationally known ISPs took the majority of the leased line churn. A number of formerly leased-line customers converted to lower cost ADSL providers.

Why did the churners leave?

This is not hard to answer, the strong presence of business DSL providers in the July list indicate price. A reseller changed wholesale provider. Negative press and the sharp reduction in sales staff, is certain to have played a part in the loss of so many major accounts.

Who disappeared completely?

A surprisingly large number of very forgettable customers and their domains disappeared from the Internet entirely and could not be found connecting to any other carrier.

Why did the others stay?

The remaining customers at the end of the due diligence most likely stayed through a mixture of inertia, and contractual terms.

Conclusion

The study of 640 Dedicated Access customers was indicative of the rest of the business, despite not having promoted solid financial performance in the media, it was clear the acquisition target was in trouble.

• The BackChannel system scoped the performance of the business without any resort to fiscal reporting.
• Identified very significant customer erosion, far higher than peer average.
• Discounted Cash Flow valid for only 18 months or less, due to high churn.
• Check network operation costs to support shrinking base.
• Timely intervention required to maintain value.
• Results had a Major impact on current business valuation.

Final note: The target was acquired three months after the report was entered, after the announcement a further fifty customers churned making a total of loss 30% of their customers in just under nine month.