Proactis and Intesource – Acquisition Analysis and Valuation Considerations

In late April, the Spend Matters research team covered some of the highlights concerning Proactis’s acquisition of Intesource at what many might consider to be an uncharacteristically low valuation. While we’re convinced Proactis is buying a sound asset with Intesource, there’s likely much more to the deal than many are considering on the surface. In this Spend Matters PRO commentary, we consider additional considerations regarding the acquisition and the deal valuation that should help bring things into better focus for customers, prospects, and technology providers alike.

Based on Intesource’s marketing, it would be easy to peg them as focusing solely on strategic sourcing – including the software aspects of structuring and running the RFx and reverse auction process. But Intesource is more than this and is very much defined by both the primary market serves (grocery and broader retail) and a business model that is not easily comparable with peers.

In considering the acquisition and the valuation, it is important to keep the following items in mind starting first with overall company and solution considerations:

  • Intesource built a business based on serving retail/grocery clients, i.e. clients in a tight margin environment (including private equity backed companies, which also tend to be quite frugal even without the added industry pressures). Because of this, Intesource’s target customer (to date) has been both a challenging and an ideal target. The targets have been challenging because of the razor thin margins they operate on, which can translate to less investment in sourcing and procurement technologies and professional services (relative to other industries). But the flip side of this is that there is pent-up demand inside many of the companies operating within Intesource’s target market for just the types of sourcing capabilities it brings.
  • Intesource brings a competent e-sourcing tool with good award analysis functionality and a fresh design compared with many peers. However, the organization is not set up from a sales and marketing perspective (or with channel distribution, such as retail software specialists) to fully take advantage of being able to bring these products to market, independent of the broader solutions/services focus.
  • Intesource does not yet have a supplier network model/offering, but the network potential is definitely there. It would be hard for anyone to argue with the strength of having a database of 17,000 qualified suppliers for the targeted vertical sector served. But Intesource needs some additional thought to turn a network strategy into a resource that can drive more revenue. Such a plan could include premium placement to help suppliers market to the Intesource customer base, helping overcome onboarding issues, solving common compliance issues, and perhaps even validation of some core data points – and do this in a many-to-many network model. In fact, if Intesource can target these opportunities with Proactis, they’ll be able to hang the legacy sourcing business off the network – rather than the other way around (including value add services for suppliers that potentially enhance revenue).
  • Intesource has a strong understanding of what’s needed for supplier information management (SIM) with its new toolset. Spend Matters’ initial analysis suggests that Intesource’s new SIM module stacks up well. It has great features and a nice design—possibly even capable of being expanded to a strong SLM and a capable supplier onboarding resource. But we haven’t examined the supplier experience or spoken to users that have or are planning to roll it out. Yet combined with the network potential, supplier management could become an extremely valuable (and sticky) value proposition of the combination of Proactis and Intesource.

From a valuation perspective, we should also factor into account the following:

  • The low announced valuation was likely representative of a number of converging factors (outside the Intesource business model) including the potential for plateauing revenues pulling down the numbers. Any organization at the $5-million mark, especially one that is potentially plateauing or declining in revenue, is worth significantly less to investors than when it is able to ascribe a multiple to revenue and earnings growth year-over-year.
  • Moreover, except for high-growth start-ups or those with remarkable technology, $5 million is really the cut-off point to achieve a valuation in an exit situation in line with larger organizations. In short, much as real estate appraisers are not supposed to compare 2-bedroom house valuations with 4-bedroom house valuations, even on a square footage basis on a similar block, so too must smaller companies be compared within their size/valuation peer group rather than against larger organizations.
  • Intesource lacked distribution with its commercial organization that, while strong, was too small to drive traditional, scalable SaaS software sales. Intesource relied too heavily on customer intimacy alone without having the back-up firepower to invest in building a go-to-market and lead generation strategy like peers such as MarketMaker4, which emphasized a cloud applications sales model even with support services available.
  • In addition, the potential exists (which may have helped drive a sale) that the investors were at the end of a fund lifecycle (for their investment funds that originally put the money into Intesource). When closing out a particular investment fund, venture capitalists often prefer to have a clean break, which can drive a speedy sale (potentially at valuations below what otherwise would be expected market levels) of a lagging asset, in particular if other investments in the fund have been highly successful.
  • Finally, and perhaps most damning from a valuation perspective, Intesource has adopted a services centric model that doesn’t justify typical SaaS multipliers. In fact, one could argue based on how the provider works with many of its clients that Intesource is in many ways a staff augmentation or managed services provider for their clients – delivering temp capacity (that comes with software and other capabilities) when needed. While there is nothing wrong with this model, it definitely has the potential to hold down valuation multiples.

Regardless of intangibles and valuation, Proactis is clearly acquiring a niche but clever organization that would be hard to duplicate. Yet whether Proactis sees a strong return on their investment will depend in part on working with Intesource to bring to market some of its newer, more innovative stand-alone technology and network capabilities – not to mention a broader solutions vision that goes beyond its full service sourcing roots.

The potential to expand or create advanced supplier management, business network, and onboarding/qualification services holds significant value potential for existing Intesource clients as well as across the broader Proactis customer base and solutions offering.

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