The ongoing M&A transactions involving Activant, Epicor, Lawson, and a phalanx of others waiting in the wings are expected to enter a new phase of intense negotiations all in the hopes of securing the best possible deals for their shareholders.
Two of this year’s biggest software deals – the merger between Activant and Epicor bankrolled by UK private equity firm Apax Partners and Infor’s offer to buy Lawson – present striking contrast over the valuation of these ERP applications vendors.
The final outcome could serve as a harbinger for the software sector as the fight over market share intensifies triggering an avalanche of deals for the remainder of 2011.
A closer look at the balance sheets of the ERP vendors being acquired suggested that Apax, or the investors who entrust their money with the private equity firm, could end up paying a lot more than those on the Infor side, which coincidentally is also owned by a private equity firm called Golden Gate Capital.
Between The Lines
It is a telling example of how the two investor groups have placed such different premiums on their targets using common metrics: sales, earnings and long term debt.
As the accompanying chart shows, Apax is paying $976 million, or $12.50 a share, for Epicor, which has not been profitable since 2008. Epicor had about $103 million in cash as of December 31, 2010. Subtracting that, Apax’s offer goes down to $873 million. On the other hand, Epicor’s long-term debt reached $230 million as of the end of last year.
Despite its recent losses, Epicor 9, its latest flagship ERP release, has been gaining momentum since making its debut in late 2008 with more than 300 live customers and another 600 going live by June of this year. Robust demand for Epicor 9 propelled the vendor’s license sales by 17% to $82 million last year.
Activant is a different story. Apax is paying $890 million plus $69 million cash on hand, totaling $959 million, according to its 8K filing with the SEC. Activant does not have the equivalent of Epicor 9, a go-to-release that its 10,000+ customers could migrate to in droves. Instead Activant offers multiple ERP brands such as Catalyst, Eagle and Prophet 21 that it culled from a series of acquisitions. Despite the purchases, its revenues have barely budged since 2007. For its latest quarter ended Dec. 31, Activant’s systems revenues including license sales rose 5% to $29 million, while services revenues including maintenance were unchanged at $61 million.
What’s astonishing about Apax’s nearly $1 billion offer to buy Activant is the vendor’s sizable debt load, which amounted to $495 million as of the end of 2010. To be fair, Activant has been paring its debt – down from its peak of $633 million in 2007, by selling off assets such as its productivity tools division last year.
It will be interesting to see how the merged company under the Epicor name will fare – specifically whether it can turn a profit – after getting about $2 billion in cash from Apax, whose investors are now saddled with a total debt load of at least $725 million. In 2010 Activant’s annual interest payment topped $31 million, or 8.3% of its revenues, and Epicor’s was $20 million, or 4.5% of its revenues.
By comparison, Constellation Software paid $3.8 million in interest, or 0.06% of its revenues last year after embarking on a series of acquisitions to become a major ERP vendor bigger than Epicor or Activant. Even Oracle’s $754 million in interest payment amounted to only 2.8% of its revenues last year.
Infor’s Offer Is A Steal
If the merger between Activant and Epicor sounds overpriced and it may take years before Apax can get its desired return, Infor’s $1.8-billion offer, or $11.25 a share, to buy Lawson is a steal.
After subtracting Lawson’s $302 million cash on hand, Infor’s offer goes down to $1.5 billion. Lawson’s long-term debt was $230 million and its annual interest was $12 million, or 1.6% of its revenues.
The real gem of Lawson is in its consistent performance, thanks to rising license and maintenance revenues since 2005. In its latest quarter ended Feb. 28, Lawson’s license sales grew 6% to reach $33.7 million, while maintenance revenues rose 9% to $97.4 million. Earnings per share jumped to 13 cents from 1 cent in year-earlier period.
During the quarter Lawson secured 313 deals including six worth more than $1 million and its average selling price spiked 22% to $114,000. The vendor also experienced across-the-board increase in its regions including Lawson EMEA where it advanced 6% in sales as it began to emerge from its doldrums.
What Infor is aiming to purchase is a reliable performer with relatively low debt and considerable traction with its core operations namely healthcare and Human Capital Management, as well as continuous improvement to its M3 product line sold primarily in Europe. By most measures, Lawson, even at its Friday close of $12.37 or 10% premium over the Infor bid, appears to be undervalued and the Infor offer less generous than what Apax is paying for Activant and Epicor.
That brings us back to Constellation Software, which is scouting for a buyer or merger partner after naming BofA Merrill Lynch and BMO Capital Markets as its advisors on the same day Apax announced its purchases.
With a market cap of $1.47 billion, little debt and an eye-popping recurring revenue stream at $337 million in 2010 maintenance sales after jumping 34% from a year ago, Constellation Software could fetch a higher price than Infor’s bid for Lawson, or even the combined purchase of Activant and Epicor.
Then again beauty is in the eye of the beholder and some insanely high or ridiculously low offer could be made and even accepted by Constellation Software, throwing the whole valuation exercise out of whack. Think HP’s bidding war against Dell over 3PAR.
In an increasingly heated buyout environment(16% rise in global M&A activity in first quarter of 2011 by one account), ERP applications vendors, or any software vendor with solid performance, are advised not to jump at the first chance of accepting any seemingly generous offer. Instead they should frame their strong fundamentals to their advantage by harnessing the latest market research resources to buttress their negotiating position.
Feel free to email me at email@example.com with questions on the latest ERP buyout frenzy and how you can leverage our market research data to help unlock your value.