How Does the Exposed Hotel Technology Vendor Survive COVID 19

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October 22, 2020
Technology Strategy
Mark Haley

TECH SOLUTIONS - HOW DOES THE EXPOSED HOTEL TECHNOLOGY VENDOR SURVIVE COVID-19

At this writing, diminished business levels continue outside of a few resort areas. Hotels are limping along with reduced occupancy, rates, and staff . Everyone left is now doing multiple jobs, most involving cleaning and sanitization. The vendor community is also seeing staff reductions, fewer people doing more jobs and having its own serious conversations with lenders and investors.

This is all due to the steep and sudden drop of up to $75 billion in room revenue. When hotel revenue drops, there’s less to spend on employees, debt service, renovations and IT suppliers. As demand for travel products falls, the pain will continue to flow downstream. If it goes on long enough, long-term lack of revenue for both hotels and technology vendors will have consequences for both. The prospect of undercapitalized hotels changing hands, perhaps at a fraction of purchase price or replacement cost is real, with more than 23% of hotel loans 30 days or more delinquent in August 2020. We can assume those that return will do so under a flag, with lenders unwilling to rescue an asset that isn’t supported by a major distribution system.

What happens to technology vendors that don’t have the liquidity or access to new sources of liquidity to survive? Layoffs and furloughs will only go so far. A vendor partner without enough revenue and no access to cash that will keep them alive well into 2021 will face one of three scenarios:

• Go out of business
• Pivot to a different line of business or sector
• Get acquired by a company with more liquidity

“I think it is very likely we will see consolidation in the hotel technology space, perhaps especially in the PMS segment, where those with a differentiated product will stand out,” said Michael Yeomans, head of strategy and transformation at Amadeus Hospitality.

Other industry leaders agree. “We definitely will see vendors exposed by COVID and some will get acquired by someone at some price,” said Jason Floyd, senior vice president and general manager at Infor Hospitality Floyd. He adds that it isn’t only small vendors in play. “I don’t see any of the large global players selling out, but other vendors, ones without a solid global footprint are at risk. A strong global presence gives geographic diversity. Right now, North America is hurting. But Europe is ramping up. I’m not sure that more regionalized vendors of any size have the benefit of that diversity.” “I think that is a solid thesis,” said investor Ron Tarro, former CEO of SDD, Inc. “A well-funded startup is lucky to have 12-18 months of cash on hand. But the math on recovery for hospitality technology is more like 24-30 months, so many will have to do something.” Acquisition Criteria Most observers start an acquisition discussion with financials. They give more weight to projected future revenues and expenses than in the past.

Additional concerns include:
• Does the technology fit in with the buyer’s existing product portfolio and technology stack?
• Can the UX be aligned with existing products?
• Is there a people and culture fit?
• Will the acquired product(s) increase sales of those already in the portfolio?
• Will it accelerate time to market or open up segments the acquirer can’t readily tap otherwise now?

Investor Sean O’Neill, former CEO of Newmarket International, has considerable first-hand experience with both sides of mergers and acquisitions in hospitality technology. He recommends focusing on the customer base. Are there one or two customers at the brand level that make up a major portion of the installed base? If so, the acquirer must understand how solid those customer relationships are. “Brand relationships will become even more critical for vendors as the need for owners to source data security and data privacy capabilities from brands continues to escalate along with lenders pushing the new owners of foreclosed hotel assets to adopt a major flag,” O’Neill said.

Implications for Customers
If a vendor gets purchased, what are the implications for the hotel company customer base? Obviously, a lot depends on the new owner’s intent. If the goal is to add to an existing portfolio and use the broader offering to drive sales of all products, it will probably be beneficial. The new owner will possibly invest in software development, services and sales to a degree the prior company could not have. On the other hand, Tarro said, “If a smaller company gets folded into a larger company, what they could once do nimbly and efficiently now becomes a cross-functional exercise requiring layers of approval and lots of processes. Things go slower.”

But if the intent of the acquisition was simply to buy the installed base at a low price, there’s a risk users will migrate to another offering in the same product area as the new owner attempts to reduce costs by consolidating support and development organizations. This cuts both ways. The new owner doesn’t want to drive off those customers that were the reason it purchased the company in the first place.

Even if the intentions toward the new company, along with its staff and customers, are positive, substantial executional risk remains as the parent company imposes its processes for order entry, contracting and support. Customers will definitely pay the price for poor execution during the integration phase. (See sidebar: Now We Have to Make It Work.) One way to mitigate this risk is to not integrate operations, but rather to let the acquired company operate on its own, with previous support, development, sales and back office capabilities. This strategy isn’t cheap. It denies the new owner cost synergies from combining back office, development and support. The biggest cost may well be loss of incremental revenue for the rest of the product portfolio. Probably the worst outcome for customers is for the original vendor to go out of business altogether. That leaves the hotel with an orphan product and no buyer invested in keeping its clientele. This forces the hotelier to rush to market or otherwise find a replacement, with nowhere to turn for support in case of a problem. It’s safe to expect a meaningful amount of consolidation in the hospitality technology sector.

We’ll have to watch and see who the buyers and their targets are, then draw our own conclusions as to the underlying motivations of both – and whether or not they achieved their strategic objectives.

MARK HALEY is a partner at Prism Hospitality Consulting, a boutique firm serving the global hospitality industry in technology and marketing. Consulting with hoteliers on the application of technologies to address long-standing and emerging business challenges is a core practice area. For more information, please visit https://prismhospitalityconsulting.com. 


We’re Really Worth More Than That!

In any serious merger and acquisition (M&A) conversation, the seller wants to get paid as much as possible and the buyer wants to pay as little as possible. Some things that might move a seller off that opening posture could include a desire to:

• Keep staff employed
• See the company flourish and grow with investment from the buyer
• Get the deal done quickly

The buyer might have an equally compelling need to complete the transaction quickly or more likely, be willing to overpay to get:

• People with skills they really need (the so-called “acqui-hire”)
• Access to an installed base that will grow its existing business meaningfully

External factors can affect valuations significantly. “Joe Biden proposes to increase ordinary income tax rates as well as capital gains taxes, including subjecting capital gains over $1 million to the top ordinary rate he has committed to of 39.6%. Then add state and local taxes. The prospects of a Biden election have countless business owners running for exit preparation, needing to prepare their businesses for sale in 2021,” said John Rovani, managing partner at Ponterra Business Advisors.

Obviously, if presidential politics increases the supply of businesses for sale, the ability of potential buyers to evaluate this much-larger pool of potential targets becomes limited. "The pandemic has already caused many independent business owners to want to sell as they have realized that their businesses may be more vulnerable than originally thought,” Rovani said. “This is especially true if their revenue streams are transaction or commission based. This is a great time for re-looking at the old business models and technologies and streamlining businesses.” What can a prospective acquisition target do to tip the scales in their favor, at least a bit?

The answers are both strategic and financial. Investor and former CEO of SDD, Inc. Ron Tarro believes first you need to understand why someone might want to buy your firm. If the selling firm has a favorable wind behind it, then the prospects of driving valuation up increase. Tarro said when he was positioning his firm for sale, the rise of cloud-based PBX platforms were a good wind in the sails of SDD as the only cloud-based call accounting platform in the market.
Other strategic considerations include:

• Does the tech stack fit? Jason Floyd, senior vice president and general manager, says Infor Hospitality’s existing product family is built on Java, making a Microsoft application tough to fit into its world.

• Michael Yeomans, head of strategy and transformation for Amadeus, places a premium on the ability to drive agile development practices at scale as a high value-add.

• Is there an opportunity to increase revenue by putting a larger sales team with broader geographical reach behind the product?

• Can this product pull along sales of other products in the portfolio, a metric Floyd refers to as the “attachment rate.”

• Does the target’s installed base represent a segment or geography the buyer isn’t exposed to currently? Will purchase gain entry to those markets much more quickly than organic growth ever could?

When it comes to M&As, financial considerations come to the forefront. “Get your house in order. Really understand your business, and make sure your books are complete and solid, for both historical and forward financials. Assume that an acquirer will really tear into your raw data and find any inconsistencies,” said investor Sean O’Neill, former CEO of Newmarket International.

Floyd agrees. “First, look at current EBITDA position. The numbers have to satisfy my CEO and board first, with good actuals and a strong forecast,” he said. Take a critical look at the target company’s debt structure. If there has been a lot of financial engineering, then there could be an issue. It might mean a $10 company sells for $1,” Tarro said. The seller should have a defensible estimate of the total addressable market (TAM) for its products and services. If the target brings a realistic and defensible TAM to the table first, the acquirer must explain why the TAM needs to be lower in any attempt to drive the purchase price down, O’Neill said.

If current circumstances mean that projected EBITDA or TAM estimates are tough to justify and defend, that limits the seller’s basis for increased value. At that point, the strategic variables of irreplaceable staff working as a coherent team using disciplined methodologies may be the best bet. Otherwise, valuation comes down to the installed base and depth of client relationships.


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