Coupa’s Biggest Acquisition Yet (Part 1) — LLamasoft Transaction Overview, Initial Musings and Deal Tailwinds

Earlier this morning, Coupa announced it was acquiring LLamasoft in a $1.5 billion transaction (with the deal expected to close Nov. 2, 2020 — today). My colleagues on the analyst team at Spend Matters PRO are covering the transaction from a procurement and supply chain practitioner perspective. In short: what it is, why it matters and what it might bring product-wise from the combined organization. You can read Spend Matters coverage today here: the breaking news, PRO analysis of procurement-supply chain’s future and a PRO look at LLamasoft’s functional capabilities.

In this Spend Matters Nexus series, I’ll focus on covering the transaction from an M&A and competitive strategy perspective, providing analysis for a narrower audience interested in the transaction from an investor and corporate development vantage point.

Today, I’ll start with an overview of the deal (transaction overview + analysis), offer up some initial musings, and share some of the tailwinds that might support the deal as the combined organization takes its wares to market.

 Jason Busch is Managing Partner of Azul Partners’ Investor Advisory Group. He works with sponsors, CEOs and boards on data-driven due diligence, M&A and business strategy. Jason is also the lead author of Spend Matters Nexus, a private newsletter. Disclosure: Spend Matters’ parent company, Azul Partners, provided due diligence services to Coupa as part of this transaction.

Coupa-LLamasoft Transaction Overview

The transaction is valued at “approximately $1.5 billion,” according to Coupa’s 8-K filing. The terms of the transaction include $795 million in cash, “including repayment of debt and expenses.”

The exact cash consideration is “subject to customary upward or downward adjustments for the Target’s working capital,” as noted in the SEC filing. Furthermore, the remainder of the transaction is being paid in “the form of 2,403,713 shares of Coupa’s common stock,” a total representing approximately $624 million based on Coupa’s Monday morning share price.

Coupa did not provide insight into LLamsoft’s revenue when the transaction was announced. If we triangulate from the average of Owler and Zoom revenue estimates, we can estimate that its revenue was in the range of $90 million to$95 million. This would suggest a valuation of about 15-18X revenue, which for a growth company in the enterprise SaaS/cloud sector today, is within a typical range.

Outside of the numbers itself, the acquisition of LLamasoft:

• Represents Coupa’s largest transaction to date — and one that, for arguably the first time, will bring material inorganic revenue to the provider in a single transaction.
• Is one in which technology, business process and change management integration is likely to be easier than most, both for Coupa and its customers (as LLamasoft is really just a decisioning layer sitting on top of supply chain, finance, procurement and other data systems).
• Brings another tool for “power users” to Coupa’s customer base that is used by the few vs. the many — like other “Power Apps” in the areas of sourcing optimization, contract management, spend analytics, etc.
• Provides a new solution for partners to jointly elevate procurement and supply chain within companies at the (C-suite level). In particular, it will be really interesting to see how firms like Accenture, Bain, BCG, Deloitte, KPMG, McKinsey and others can work with Coupa and their customers at the intersection of procurement and supply chain strategy, network design and optimization.
• Provides solutions to customers that are an ideal fit for volatile times in which traditional planning and forecasting approaches to supply chain management and procurement are no longer working because of supply and demand shock that fall outside the normal bounds.

Coupa-LLamasoft: Initial Transaction Musings

I would argue there are five solid primary reasons for the deal from Coupa’s vantage point.

These are:

• Providing further fuel to the ARR/MRR story and growth for Coupa.
• Expanding the audience for Coupa solutions into a logical adjacencies — with increasing overlap with procurement and finance — which could also be an economic buyer of additional solutions.
• Offering immediately applicable use cases for procurement and finance (Coupa’s customers) that do not require new modules or products to be released — and are immediately applicable today. I would wager these might center on supply chain/supplier risk management, sourcing/network design, trade/localization, CSR and related areas.
• Offering both a new offense and defensive against SAP (depending on your vantage point). The transaction also will provide a foot in the door to many SAP accounts (as well as those in which Coupa had a beachhead elsewhere in the organization, but not with the same audience). Later in this series, I’ll provide further insight into the competitive dynamics involving SAP and this transaction, and how it may benefit Coupa in SAP shops.
• Providing Coupa with 150+ data scientists, making it the Facebook/Google of the sector in terms of engineering and mathematical horsepower in this area. In terms of both one-to-one (configured/bespoke) and community intelligence standpoints, the “call option” this team can provide to Coupa to further enhance its core offerings and those it might acquire in the future is really fascinating. Based on our own analysis, this team already brings:
  • Deep analytics knowledge across multiple algorithmic domains
  • Deep expertise in design across the supply chain
  • Deep expertise in many industries in the “direct” space
  • The depth of configurability/customization to support end-to-end supply chain considerations
  • A lot of KPI metrics to showcase areas of value from investment and to measure the results for customers

As a final initial thought, all Coupa needs to do to get a base hit from this combination is to position the decisioning aspect of bringing procurement, finance and supply chain together to improve big, challenging strategic corporate decisions within the Global 2000.

I don’t see this as a major hurdle. Because a realized ROI from LLamasoft is based on strategic decisions made from the solution by a handful of stakeholders, not long-term systems integration and business process change management involving an entire function or company, the business-case benefits are more predictable and less at risk.

And also, in theory, it’s easier to sell if you have the right track record, relationships and vision for how to use it.

Deal Tailwinds

Deal tailwinds (and headwinds) always provide a useful frame of reference to analyze transactions from an “outside-in” perspective. There are numerous tailwinds supporting the transaction and the need to bring together procurement and supply chain decisioning. From our vantage point at Spend Matters, five that immediately come to mind are:

• Risk management (proactive) — COVID-19, China/U.S. relations (and trade policy), Brexit/EU/UK considerations have all highlighted the need for companies to become more proactive when it comes to their overall risk management practices. Scenario planning and modeling, especially considering both the inbound and outbound supply chain, can help organizations proactively plan for continuity while also highlighting the need, in the first place, for procurement to take a greater leadership role in enterprise risk management.
• Risk management (reactive) — Companies have been forced to dynamically reconfigure their supply chains as a result of risk incidents — some more successfully than others. Reacting to broad-based risk elements effectively requires an end-to-end supply chain level of consideration vs. a procurement, supply or supplier one. Through rapid modeling and simulation, this is LLamasoft’s tactical “bread and butter.”
• Cost volatility / total cost — Cost volatility continues to be an important consideration for procurement, due to both policy (e.g., trade/tariff) and supply/demand considerations. In fact, S&P Platts suggests that “global commodity traders expect 2020 to rank as one of their strongest ever in terms of profitability after benefiting from ‘unprecedented volatility’ and market dislocations” Further, commodity, currency, tax and cost of capital / working capital considerations all contribute to designing optimally profitable supply chains.
• Demand uncertainty — Demand and economic uncertainty makes traditional supply and demand planning efforts more challenging than ever (e.g., traditional S&OP and demand planning approaches using traditional datasets are continuing to prove less effective than the past). For example, a retailer sourcing gas grills or outdoor heaters must lock in orders and volumes with suppliers 6 to 12 months in advance without knowing actual demand (e.g., factoring in COVID-19, consumer spending, etc.)
• Data complexity — Digital disruption is contributing to (not solving) the log scale increase in the data available to make decisions. Internal core systems proliferation, supplier data, customer data, cloud applications, IoT and other sources are contributing to the challenge of bringing together different information sets to make optimal decisions, especially in a timely manner.

Now that you have a Coupa-LLamasoft transaction overview, stay tuned for additional Spend Matters Nexus coverage. Up next: Competitive Landscape and Strategy Analysis.