Monday, 7 September 2009

GOTCHA: Kofax Acquires 170 Systems


Kofax announced today the acquisition of 170 Systems. 170 Systems’ audited financial statements for the year ended December 31, 2008 reported revenues of $28.1 million, a net loss from operations of $2.6 million and gross assets of $20.9 million. During the latter part of 2008 the company restructured its operations with the goal of approximately breaking even on the same level of revenues during 2009 and, on an unaudited basis and excluding expenses relating to this transaction, the company achieved that objective during the first six months of 2009.

Kofax expects to effect additional cost savings made possible by its acquisition of the company between now and December 31, 2009. To acquire 170 Systems, Kofax paid total consideration of $43.0 million or net consideration of $32.9 million after deducting $10.1 million of cash held by the company. Of the total consideration $29.7 million was in cash, $9.0 million was in the form of a note payable due on September 4, 2010, bearing interest at the rate of five percent per annum and guaranteed by Kofax’s bank and $4.3 million in the form of a hold back, with $2.3 million to be released on September 4, 2010 and the remainder on September 4, 2011, subject to certain indemnification terms and conditions.

So based upon what we currently understand are the details of the deal and assuming a mid - 2009 valuation:

Revenue multiplier 1.1X revenue
EBIT multiplier n/a negative earnings
Earn-Out ~15%; $4.3M

This shows that companies that are not yet showing positive earnings can still be sold at ~1X revenue, assuming their is a strategic fit.In addition, 170 had $10M cash on hand, which they can can use to fund growth.

From a competitive market standpoint this deal maybe underscores a trend by the larger capture, imaging & IDR technology companies to move further up the value chain into business process applications markets. Who will follow and what effect might this have on the Kofax reseller network?