K3 buys Retail Technology Ltd. Risk for little reward.

It’s interesting to see K3 make another acquisition in its apparent quest to corner the UK market for Microsoft-based point of sales software.

K3 has bought Somerset based Retail Technology Ltd for £610K, a multiple of 0.8x sales and 4x prospective 2014 pre-tax profits. It will add an underwhelming 2% to K3’s retail turnover, which was £39m last year.

On the positive, RTL does build its solution on Microsoft just as K3 does. There is clear synergy here and RTL may have developed some proprietary code that has wider market use, For example it has the necessary integrations to Clarks for vendor-managed inventory.

And there looks to be plenty of scope for cost cutting too. K3 generates £100K sales per employee while RTL produces just £22K; indicating both a certain lack of process automation and remarkably low salary levels.

So, the purchase should be earnings enhancing but it does also pose some questions.

Firstly, you have to wonder about the strategic fit of the new business. K3 has done well moving upmarket and has announced wins with Charles Tyrwhitt and Ted Baker. Yet, with RTL it has bought 180 independent retail customers generating an average of just £4400 revenue each. These customers risk becoming an annoying distraction from the core strategy.

Secondly, the acquisition will also bring some partner challenges. RTL has a well-developed network including Shopify for e-commerce and bLoyal for loyalty. K3 will need to keep these relationships going (existing RTL clients will insist on this) but has its own solutions.

Maybe the plan is to cross-sell K3’s e-commerce and CRM tools to the RTL base. Maybe not. Either way, this acquisition adds complexity for very little top line benefit.

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