m&a integration : integrating xaas companies

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Integrating Xaas Companies | FTI Consulting, Inc. 1

Integrating XaaS Companies

Anything-as-a-Service (“XaaS”) platforms continue to dominate cloud-based product solutions as processing and memory costs steadily decline and connectivity capabilities accelerate. The lower costs and higher efficiency associated with these services make them attractive to both the solution provider and the customer.

For solution providers, XaaS offerings generate recurring and more predictable revenue streams than on-premises alternatives, and typically enhance customer lifetime value. For customers, cloud-based solutions reduce upfront capital expenditure requirements, make cash outflows more predictable and can be tailored to specific use cases. It should be no surprise that worldwide spending on public cloud services will grow at a 19.4 percent compounded annual growth rate (“CAGR”) from nearly $70 billion in 2015 to more than $141 billion in 2019.1

XaaS offerings are wide-ranging in breadth and the sector

remains highly fragmented. This makes it ripe for opportunistic

consolidation across the large number of startups and

established players to accelerate transition of their business

models. Consequently, XaaS companies have been at the

forefront of merger and acquisition (“M&A”) activity in the past

few years. There was $50 billion of public company cloud-

related acquisitions occurring in 2015 — a 60 percent jump

from $30 billion of related deals in 2014 — and deal activity is

expected to remain strong through 2017.

Unlike traditional M&A that typically relies primarily on cost

saving synergies, transactions involving cloud-based service

providers are mostly revenue-driven deals. They offer buyers

the potential to scale up, close gaps in product portfolios and

become more deeply embedded with clients by offering a wider

array of customizable and/or integrated business solutions.

On-premises solutions require extensive engineering, support

and professional services costs to maintain multiple legacy

versions, and these costs are exacerbated by the complexity of

acquisition integrations. That said, XaaS integration comes with

its own unique considerations around deal execution, its impact

on functional areas (e.g., marketing, sales, products, pricing and

customer service) and other related risks and opportunities.

1. Forbes, “Roundup Of Cloud Computing Forecasts And Market Estimates, 2016”, March 2016

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What the Experts SayFTI Consulting recently conducted an interactive M&A

Integration Roundtable discussion involving a few industry

experts on our panel and in our audience who are actively

involved in leading XaaS transactions and integrations. We

evaluated polling responses of several audience participants,

which we herein present along with key perspectives shared by

the experts serving on our roundtable panel.

Key Deal Objectives When Acquiring XaaS Companies

What Our Polling Results Show

M&A deal objectives involving XaaS companies are driven

primarily by revenue opportunities. A whopping 69 percent

of audience respondents indicated that diversifying products

and services was a key objective of such acquisitions. In

addition, 15 percent said that acquiring technology was a key

deal objective, with another 15 percent citing the opportunity to

expand their customer base in existing geographies.

Integration objectives are tough to fully achieve. Only 14

percent said XaaS integration objectives were three-quarters to

fully achieved, 29 percent said that one-half to three-quarters

of integration objectives were achieved and 57 percent of

respondents said that less than one-half were achieved.

M&A appetites vary considerably. Fifty three percent of

respondents said their companies would make one to two

XaaS acquisitions over the next two years, 27 percent said they

would be acquiring three to five XaaS businesses and seven

percent said they are eyeing six or more XaaS acquisitions. Only

13 percent of respondents said they would not be making any

acquisitions.

FTI Consulting’s Point of View

Achieving deal objectives

▶ Companies need to assess the product and market fit

of the combined new portfolio based on product and

customer dimensions.

▶ Companies must assess the brand impact of the

acquisition on the product portfolio and market

segments to align with marketing to communicate

change.

▶ The right pricing model needs to be defined for the

stand-alone entity, as well as the integrated business

model in order to avoid cannibalization of both business

models.

Execution guidance

▶ Invest the time and effort needed to identify the right

target – one that aligns to the corporate strategy,

complements (or diversifies) the product portfolio and

brand, with the ability to transition to a subscription

model and provide a clear path to meet deal objectives.

▶ Be cognizant about the difference in procuring and

monetizing offerings when acquiring diverse products

and business models.

▶ Have a direct-to-customer sales channel to help

integrate the XaaS business into the buyer’s portfolio.

Functional Areas Impacted by the XaaS Model


The sales function has the greatest impact on meeting

deal objectives. Fifty percent of respondents identified sales

as the highest impact function, while 25 percent said product

development capabilities and 13 percent identified customer

relationship engagement (“CRM”).

The sales function also is the most challenging area for

XaaS integrations. Sixty three percent of respondents cited

sales as the greatest challenge to achieving deal objectives,

followed distantly by product development capabilities and

customer engagement at 13 percent each and marketing at six

percent.


Deal impact on functional areas

▶ Sales and marketing are at the forefront of new revenue

generation, as focus shifts to optimizing recurring

revenue growth through customer acquisition,

up-selling, cross-selling and retention.

▶ Sales forces are at the risk of competing against each

other for customer acquisition if incentives are not

aligned and integrated.

▶ Customer service plays a more proactive role, working

with product development to define feature and

functionality requirements based on customer feedback.

69% of audience respondents indicated that diversifying products and services was a key objective of such acquisitions.

TECHNOLOGY INSIGHTS

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Execution guidance

▶ Incentivize sales teams to transition from on-premises

model to XaaS solution.

▶ Educate sales teams on new pricing models and key

differences between the XaaS and on-premises models.

▶ Ensure to find the right timing and scope for the quote-

to-cash integration, as the process varies for XaaS

compared to an on-premises environment.

Key Risks during Integration of XaaS Acquisitions and Mitigation Plans


Customers matter most on the revenue side of XaaS

deals. Fifty percent of respondents said customers required

the most comprehensive risk management activities following

acquisition of a XaaS solution, followed by channels (38

percent) and products (13 percent).

Respondents were more divided on the issues that

challenged culture integration, with 33 percent citing

misaligned incentives, 33 percent citing burdensome policies

and procedures, 20 percent citing leadership norms and 13

percent identifying issues of entrepreneurial spirit.

What Our Panelists Said

Integration Challenges▶ When transitioning from a traditional on-premises

business to a XaaS model, it’s critical to educate sales

team on the new pricing model and how it differs from

the on-premises model.

• Incentivize sales team to transition to a XaaS model.

• Develop the appropriate pricing model that meets

the needs of your customers without creating

internal conflict.

▶ The acquired company needs to leverage the in-place

capabilities of the buyer — and they may need coaching

on existing processes and infrastructure.

▶ Never underestimate the importance of integrating

corporate cultures.

• Culture differences and clashes can impede the

integration.

• Culture integration planning should begin very early

in the deal process.

• Address culture issues top-down and bottom-up, as

junior-level employees are critical to the success of

the integration.

▶ The integration of finance and operations should pose

fewer challenges than other functions, such as sales

and marketing, and that integration should begin early

on.

▶ Sales cycles and quote-to-cash processes may differ

among existing and acquired services, which leads to

challenges for sales and finance teams.

▶ Customers should be able to try the XaaS product

easily in order to make a decision on how the XaaS

offering fits into the product suite and which version

they prefer to use.

▶ Channel coordination (direct vs. indirect) of the XaaS

offering is vital to its success.

▶ Having multiple acquisitions spaced closely together

makes integration efforts even more difficult.

Managing Integration▶ Leverage integration teams with representation from

various business units and functional areas.

▶ Create a “buddy system” with buyer and target sales

teams to help salespeople learn and sell new offerings.

▶ Implement pilot programs with select customers.

▶ Consider delaying integration efforts in areas where

there is no immediate solution to integration challenges.


Integration Risks and Mitigation Plans

▶ Competing demands for internal resources (e.g.,

R&D, sales, customer support) during and after the

integration process needs to be carefully managed.

▶ New XaaS business could cannibalize existing

on-premises business, so expectations need to be set

with internal and external stakeholders.

▶ Managing operations for XaaS companies related to

back-office functions, performance metrics and revenue

recognition are different and needs to be defined

and managed appropriately. For example, customer

acquisition costs (“CAC”) and committed monthly

recurring revenue (“CMRR”) need to be front and center.

About FTI ConsultingFTI Consulting is an independent global business advisory firm dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities.

www.fticonsulting.com ©2017 FTI Consulting LLP. All rights reserved.

The views expressed are those of the authors alone and do not express the views of FTI Consulting, Inc. or any of its employees.

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.

EXPERTS WITH IMPACT

Technology Insights

Nitin KumarSenior Managing Director +1 408 915 8627 [email protected]

Brian Hoard Managing Director +1 415 283 [email protected]

Aidan Searwar Managing Director +1 415 283 [email protected]

Execution guidance

▶ Mitigate risk by clearly differentiating between XaaS

and on-premises offerings; having two types of

offerings sold across both direct and indirect channels

while targeting the same customers increases risks

during integration.

▶ Treat XaaS customers and on-premises customers as

different propositions; they will have different buying

preferences.

▶ Maintain morale by keeping both models separate

initially before integrating — then be transparent about

changes. Personnel from the on-premises product

group might be demoralized about changes, which

could result in attrition.

The Last Word from our Panelists on the XaaS Business Model and Integration

Following are additional execution considerations identified

by the roundtable panelists and audience members as leading

practice considerations for a successful XaaS acquisition

integration:

▶ Get buy-in from executive and senior management teams of

the buyer and the target — forcing integration on the target

rarely works out well.

▶ Avoid long lists of items to focus on; instead, identify three

to five time-critical items the target should deliver before

closing a deal.

▶ Understand the differences inherent in cross-functional

teams as members will often have mismatched expectations.

Differences in processes will also exist. Try to anticipate these

differences upfront, identify critical areas where mismatched

processes or expectations exist and give them some time,

typically several months, and then figure out a plan.

▶ Ensure integration teams have representation across

business units and operations teams.

▶ Bring all internal stakeholders to the table as early as

possible. Sales and other functional areas should be part

of the process. Engage the sales team and understand

how they intend to go to market. Learn from new product

introduction practices.

Conclusion

Identifying the right business that can complement or diversify

a company’s existing portfolio and drive revenue expansion is

a major objective behind XaaS acquisition considerations. To

fully capitalize on an acquisition, integration must be diligently

planned and executed.

Too often, companies rush into integration and destroy value in

the transition process by addressing financial considerations

before completely understanding the new product portfolio

and determining what sales teams need to do to successfully

migrate customers. Branding, messaging and operating models

are also often afterthoughts. Such a poorly executed strategy

results in confused messaging, lack of organizational focus and

a likely loss of customers and synergy realization.

Depending on the degree of business model differences and

the readiness for XaaS integration, it may make sense to leave

the acquired entity separate for some time post-closing. While

waiting for an opportune time for the integration, determine

how product portfolios will be integrated and then build your

business model through marketing and brand integration. This

will enable you to deliver integrated and cohesive messaging to

both the XaaS and on-premises sides of the organization, your

channel partners and end customers. Once this is done, you

should transition sales teams, operating systems and business

processes — only then will you have laid the foundation to

successfully migrate customers, achieve synergy targets and

realize deal objectives.

Contributing Experts: Sumit Shukla, Neustar; Steve Burke, Intel; Kevin Lobdell, ex- Oracle; Cuneyt Buyukbezci, Aerospike; Jithin Bhasker, Adobe