Product Strategy Due Dilligence for Private Equity

Often times private equity firms can squeeze value out of tarnished and known logos with stagnant growth trajectories.  Efforts are mostly aimed at squeezing  bloated operating expenses.  Sometimes, it doesn’t work out so well, the most recent news on TPG and Silverlake’s woes with Avaya tell a great story. 

This past week, reports in the Wall Street Journal1 and other sources swirled around the sale of Avaya’s contact center business to stave off bankruptcy.  TPG and Silverlake acquired Avaya for $8Bn back in 2007, selling off the contact center business may bring in $4Bn, which could be applied in part to that pesky $6Bn of debt outstanding.  Squeezing operating expenses was not enough or perhaps too much.

Revenue growth is fueled by great corporate and product strategies then propelled forward by sharp marketing and sales strategy and execution.  When private equity firms buy tarnished logos, they replace the corporate heads, revise the strategy, slash expenses and often miss important factors when evaluating the product shortcomings and the market place in their due diligence.  In the case of Avaya the evidence comes from loss of market share prior to private equity acquiring and Moody’s ratings agency reporting in August that Avaya “needs to constantly reinvest in new products and platforms to maintain its position.” 

Today there is a tremendous amount of money in private equity, looking for undervalued companies.  How can they tell if the product portfolio is too far gone?  The keys can be found in:

• Market share decline by product family greater than 3% and accelerating
• Average selling price compression or erosion greater than 5%
• Declining or no customer satisfaction rating as compared to the market leader
• Past product portfolio forecasts that failed to meet expectations greater than 10%
• Products constrained by historical routes to market when new entrants are taking buyer preferred alternate routes to market
  
  

Add all these up and the tarnish might be too much for a turnaround or arbitrage strategy. 

Companies are failing faster these days as innovation accelerates and routes to market diversify; the number of tarnished logos will expand.  As more money swells the private equity markets, competition for deals will accelerate.  Sharpening the due diligence process and diagnosing the product portfolio capabilities as well as corporate talent, marketing and sales performance accurately can greatly enhance outcomes for private equity firms.  Ascendiosa can help.
 1. Avaya Weighing Bankruptcy Filing

Author:  Mark Miller is Ascendiosa's Chief Commercial Officer

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