CustomerSat Insight talked to CustomerSat’s John Chisholm on the crucial role of intelligence in mergers and acquisitions.

CI: You say that M&A and market research need each other. Why?

JC: For two reasons. First, the right customer and market intelligence can make or break an M&A transaction. Second, M&A lets researchers apply their skills and expertise in new, strategically important ways to their organizations. M&A is an important internal client for customer and market research; research professionals deserve a prominent seat at the M&A table.

CI: You used to be involved in M&A.

JC: Earlier in my career I brokered the sale of a unit of Sun Microsystems and served as expert witness in litigation to value privately held companies in software and materials science.

CI: How does intelligence affect M&A?

JC: Increasingly, intelligence is driving not just valuations, but whether deals get done, how they are financed, how entities are integrated, and whether a buyer and seller even identify each other in the first place. Intelligence also drives recognition of synergies between buyer and seller that affect not just pricing, but whether the combination ultimately succeeds.

CI: So there’s a trend here.

Historically, financial statements, major customer purchase histories, and analyst market reports have weighed heavily in M&A. Customer satisfaction, advocacy and future purchase intentions, brand equity, partner and channel loyalty, workplace culture, and workforce commitment have weighed less heavily. But this is changing.

Intangible assets – intellectual property, brand equity, customer and workforce loyalty, and goodwill – are growing as a percent of all corporate assets. According to the Federal Reserve, approximately half of all assets of non-financial institutions in 2005 are intangibles. Customer, market, and workforce intelligence are required to make informed assessments of the value of these assets.

CI: How can market researchers help?

Customer and market researchers can uniquely provide intelligence about not just the acquiring or target company, but also about that company’s customer base, market, workforce, brand, partners, and supply chain. In short, researchers can illuminate and detail the entire “eco-system” surrounding the other company—a picture much more compelling than just financial statements.

Figure 1. Customer, market, and workforce intelligence detail
the “ecosystem” surrounding a target for the acquirer (or vice versa).

CI: At what stage of M&A does intelligence come into play?

JC: Most people just think of intelligence in the due-diligence stage. But intelligence actually plays a key role in every stage of M&A, from strategic planning to valuation to post-acquisition integration (Figure 2).

Figure 2. Intelligence plays a role in every stage of the M&A process.

CI. How does customer loyalty affect valuations?

An important valuation technique is net present value (NPV) of a company’s projected cash flows. Customer loyalty drives revenue growth that drives NPV.

For example, Figure 3 projects revenue growth for a company under five different customer retention scenarios. In each scenario, revenue from new customers is 25% of each year’s total revenue. Revenue lost per year is zero for the best case (no customers lost), then 5%, 10%, 15%, and 20% for the worst case. Revenue retained from existing customers ranges from 55% to 75% of each year’s total revenue (or equivalently, as shown in the legend, from 73% to 100% of each year’s total excluding new customers).

The resulting growth rates range from a high of 25% per year for 100% retention, down to a low of 5% per year for 73% retention. After only four years, revenue under the best scenario is twice that under the worst scenario. The difference in valuation for the same company with the best and worst customer retention records could easily be a factor of 3x.

Figure 3. Customer loyalty affects revenue growth and, consequently, valuation. Here, a company with $100 million in revenues in year 0 grows to $244 million by year 4 if it retains 100% of its customers. The same company grows to only $122 million if it retains 73% of its customers.

CI: How can CustomerSat help in M&A?

JC: CustomerSat solutions measure and detail customer loyalty, brand equity, competitive position, workforce and channel commitment, all of which affect negotiating strength, valuation, and post-acquisition integration. The resulting intelligence can help buyers get the best price and sellers receive full value.

To learn more, please see the presentation Applying Customer, Market, and Workforce Intelligence in Mergers & Acquisitions in the CustomerSat Resource Center (free registration required).