GOTCHA: Kofax Acquires 170 Systems

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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?

The Changing Tides of Time and Why Success Doesn’t Last

"Time and tide wait for no man" Geoffrey Chaucer

One of the most stimulating aspects of working in this industry (EDM, ECM, BPM & BPO) for me, is the constant rate of change. Technology matures, market tastes change, markets merge, new technology obliterates old technology and even sales techniques change as does the thinking of your customers. Therefore, what once brought you high levels of revenue may not now work. Just like the tide affecting the coastal landscape, then so does time have an effect upon the business landscape.

So what does that mean to senior executives and why should I find that stimulating? Well for one it is inevitable and there is no point in fighting it, so I make the decision to enjoy the journey and accept that I have to change. Accept that you are on a never ending journey of discovery and learning. Don’t try to hang on to what once worked but now is no longer valid.

There is no such thing as the perfect process or absolute performance. What worked last year may not work as well this year and in some cases may not work at all. Document Boss is in a very fortunate position that we see the vista landscape of our industry across the world and see for ourselves the changing sands of time and the effect it has on companies. Some adapt and prosper some struggle and die. What really matters is how you are performing NOW! Do you know and can you measure it? How are you performing relative to the other players in your marketplace? Has technology or the economy changes moved your prospective clients nearer or further away? You need to become better than the competition at understanding your customer requirements and be in a sector that has life. You need to check regularly that you are not in a sector that has lost touch with the moving desires, latest requirements and thinking of your intended clients. If it has then get out quickly but jump in to a new related sector with knowledge and insight and not leap into a dark hole of hope.

Nothing works all the time in all circumstances. Right strategy is important as is right execution, but so is luck. The role of a business leader is to be alert to these changes to manage the probabilities of change and be quick to capitalise on opportunities as they arise. A good example in our industry of a company that adapted well was Tower Technology. They understood their market, had a very good customer base, excellent domain expertise in the Financial & Insurance market, were close to and understood their customer, had replicable solutions, a motivated team with a good culture and a strong service and maintenance business. Several times during their development they had to adapt and change which they did very successfully and were finally acquired by Vignette.

A fast growing UK Document Outsourced service company, well positioned in the market and positioned for growth came unstuck because they were too heavily dependent on large volume, fairly low profit conversion jobs which meant they needed to "feed the factory"...they needed to move up the food chain into hosting etc. They failed to pull in new business and were very vulnerable if they lost one or two major contracts, which of course they did. Despite achieving some substantial revenue on the back of a couple of big contracts they failed to change or leverage their position and ultimately imploded.

Humility in good times and learning in bad times is a healthy attitude and will help to ensure you don’t become down trodden by not taking downturns personally. There are a whole host of elements of both success and failure that have absolutely nothing to do with you, your efforts, or your character.

"Nurture your mind with great thoughts for you will never go higher than you think"

Benjamin Disraeli

You need to be alert and positive minded to the changes and be open to change. That in itself can be a test, to be able to let go of what once made you successful. Initially it can feel like a step in to the unknown. However, you have the opportunity to test your theories as you gather latest information. If you would like assistance to “Keep your finger on the pulse of this industry” see Boss News http://tinyurl.com/cu523j

It’s not all a science there is also some art otherwise successful businesses would be run by boffins in white coats with mathematical formulae. However the scientific methodology of test, observe and replicate will put the odds firmly in your favour. Learning from the recent mistakes of others and testing provides huge benefits in your journey of success.

Testing on a small scale and keeping your eyes and ears open will give you more than a fair chance for the health and growth of you and your company. If you can do that and accelerate your long term equity value, then you are a true and valuable business leader. Nothing stays the same over time. Piece by piece the sands move and so should you but with thought, information and design.

Software AG Announces IDS Scheer Acquisition for €477 million

Software AG have announced their intention to takeover Business Process Modelling company IDS Sheer. For further details.

Software AG will purchase the outstanding shares of IDS Scheer in a cash-and-debt deal worth up to €482 million. IDS Scheer is a business process consulting firm with 19% of revenue contribution coming from licensed software products. In 2008 IDS Scheer had revenues of € 399 million.

The merger is subject to approval by German business regulators. Software AG has agreed to pay €15 per share to IDS Scheer shareholders in a voluntary public tender offer. The total value of the takeover offer amounts to approx. EUR 482 million. The projected accumulated annual revenue of IDS Scheer and Software AG together would be around 1.1 billion Euro.

The supervisory board of IDS Scheer AG, have committed to accept the takeover offer for all shares in IDS Scheer AG held by them, i.e. a total of 15,332,622 shares. Software AG expects to close the transaction in the fourth quarter.

Questions:

1. What impact will this acquisition have for the BPM sector?
2. There are over 300 BPM / Workflow software vendors globally many small and medium sized companies. Who will be the new stars and who will suffer?
3. Will this acquisition be a catalyst for a series of acquisitions in this sector?

Post your thoughts in the comment section of this blog or feel free to send me an e-mail at mark@documentboss.com

Perceptive Software Continue Growth Trend

Perceptive Software continues impressive levels of growth that are well above the industry average despite the recession. CEO Scott Coons said “Perceptive Software continues to grow at four-times the industry average, as we have for a decade”…. “Were pleased that license revenue in the third quarter was 24% higher than the quarter prior.”

Their recurring revenue maintained a record-high 35% of total revenue
License revenue in the third was higher from January to March 2009 despite worsening economic conditions.

Bravo Perceptive! If they can continue with such levels of growth then it must give hope to other companies in this sector that the economic conditions do not have to result in reduced performance.

The Seven Habits of Highly Successful Acquisitions?

Unfortunately, human nature and our general "busyness" dictates there are more cures sold than preventive measures taken. Whilst we have our head down like a worker bee, making ourselves busy, it is easy to forget to look up, ahead and plan.

Prevention is always a better alternative than cure but look at data security. How much money changes hands after there has been a disaster? How many gym memberships are sold once the person has already put on weight? How many health foods, potions and lotions are sold to people who have already had a health scare? How many security home alarm systems are sold to people once they have already had their home burgled?

Over 50% of acquisitions in our sector fail to reach their business objectives because they do not take the necessary actions in advance to increase their likelihood of success. Yet time and time again companies enter their acquisition journey poorly prepared. The result is that acquisition success has worse odds than flipping a coin, yet often costs millions to undertake.

The true failure rate is probably closer to 70% but due to many companies not having clear goals there is nothing to compare the results against. Often, goals are allowed to drift during M&A activity, as companies behave in an opportunistic manner, shoehorning requirements in an effort to save time, save costs, “bag a bargain” or just so that they can show some results for all their management time and effort as their team becomes more and more frustrated while the process drags on and on….…….

Stephen Covey’s advice in his book, “The 7 Habits of Highly Successful People”, was: Number One: “Begin with the end in mind”. This is a great first step in the all important FORMULATE stage of any M&A activity. (The 5 stages in an acquisition are Formulate, Locate, Investigate, Negotiate, Integrate)

Beginning with a clearly defined objective and goals will aid thinking and help to keep yourself and team members on track when discussions start to become complex. It is so easy to become embroiled in the detail, counting the grains of sand, that you lose sight of the bigger picture that should be giving you direction in everything you do. In order to achieve a goal a person must know where they are going.

If I was to list the 7 habits of highly successful acquisitions, then I would probably write a book around the following tenets:

1. “Begin with the end in mind” – I hope Stephen Covey would excuse me on this one but it is so important. Know your acquisition outcome from the start. What should acquisition achieve for you.
2. “Ensure you have a clear understanding of who and what you are” – this is the who and what type of company you are currently. Where are your strengths? What is your current positioning and what is your value proposition?
3. “Have a true and clear view of your competition” – if you are planning an acquisition, this is no time to overstate your strengths with a ‘Pollyanna’ view of your world
4. “Have an M&A strategy that fits with your business plan” – surely you would say this is common sense? I would agree, but having an M&A strategy really fit the company’s business plan is not as common as you may think.
5. “Create a set of SMART acquisition objectives” - be Specific; make them Measurable, Agreed upon within your team, Realistic and within a Time-frame.
6. “Acquire with the insurance of knowledge and experience” – many acquisitions fail because they try to operate in areas that they do not know well or where they have insufficient data or expertise.
7. “Don’t suffer from a keyhole vision” – ensure that you have a clear and unobstructed view of the businesses that operate in the sector in which you intend to acquire. So many acquisitions set out in pursuit of a few known competitors and then try to shoehorn them to make them fit. You need to have a good overview of the possibilities so you get the “Right Fit”
   

Actually, if I were to write a book on the habits of highly successful acquisitions I would not be able to limit myself to just 7 main points. It would probably be 4 x times as long. However, “The Twenty Eight Habits of Highly Successful Acquisitions” was not as catchy a blog title and would take a lot more time to write and I doubt many reading this blog would have reached this point.

Good ideas are ten-a-penny! Great Ideas are one-a-penny! Great Ideas that you can successfully implement are “Worth Their Weight in Gold!”

It is a great idea to have an egg for breakfast. They are high in protein, highly nutritious and, contrary to popular belief, are not bad for your cholesterol levels. However, without the skill and ability to implement your great idea i.e. “cook the egg” you just have a raw egg on a plate.

If in business you want to avoid getting egg on your face, then you need a certain level of expertise to execute. What I mean by “expertise” in this article is, “been there done that and have learnt from my mistakes”. Such a person has the “know-how” the expertise and, most importantly, the skill to implement. It is difficult to quantify how valuable this ability is in business, but I would guess if you had a level of expertise where you could just “plug-in” whenever you needed it, then you would be running not only a profitable business but a highly valued business as well.

Learning from others in business is probably one of the reasons why business biography books are still so popular. The majority are hardly edge of the seat “page turners” but they do pass on practical and useful lessons from people on the front line.

The analogy that comes to mind is; if you have ever put together some self assembly furniture without instructions, how much easier it is to assemble the second time. If you are like me, even if it does have instructions it makes little difference as I don’t read them anyway. I have been told it’s a male thing.

Having access to an executive with that first hand “know how” is just like assembling furniture for the second time. They know the short cuts and where to avoid the pitfalls, based upon practical first hand experience. The end result - they can get the job done, more quickly, at lower cost and with a better output.

Daniel Defoe (1660-1731) the author of “Robinson Crusoe” once wrote:

“Set sail with a mariner who has been shipwrecked many times, for he surely will know where the reefs are”

I am working from memory with the above quotation, as I could not find any reference to it on the internet. If you know the exact wording please do let me know.

I understand the sentiment of the above quotation, however, I must confess to a certain feeling of trepidation if my mariner has been shipwrecked too many times, as he may be some sort of a Jonah or just a totally incompetent sailor. Did they have kamikaze sailors?

Business is complex and it won’t be any less complex any time soon. The range of skills required to run a business successfully is many and varied. The time we have to learn new skills is constantly decreasing as the pace of business increases. The rate of consistent change is the only constant. For the small to medium sized organisation it is not always possible or viable to have that experience “in-house” on a full time basis. However, the value of being able to access specific vertical market expertise on a “plug-in” , ‘as and when’ basis could be highly valuable for the learning curve and growth of any company in our sector.

Running a business can be a daunting task. Too often, working in the business instead of working on the business means that you lose a certain level of objectivity. That is when outside help can be useful. Taking a close look at all aspects of your business with a new perspective can yield a better business. Firstly, in diagnosing areas of the business that need prioritising for special attention and secondly, in bringing in the right level of expertise to quickly help fix the problem. A “doer” not a pontificator. - If they have the right level of experience and knowledge. What you don’t want is the “expert” who borrows your watch and then tells you the time as they wave goodbye, only stopping long enough to hand you their invoice. You need first hand, front liners who have the battle scars to prove they’ve won their ‘spurs’ who are willing to roll their sleeves up and take action.

Good ideas are ten a penny. Ask any VC. I know individual VC’s that have 30 business plans land on their desk every week. Many of these hardly touch down before continuing their flight straight to the waste paper basket. Getting the execution right is where the rubber hits the road. Get that right and you can keep the egg off your face and replace it with a nutritious breakfast.

The Time of the Small Giants

I think the time has finally come for the (smart) small and mid-sized companies within the ECM technology sector. As I have mentioned in previous blog posts, there have been some significant changes in this industry. The number of companies that are easily seen, what I call the “tip of the iceberg” companies, have now been reduced via acquisition. This now leaves the vastly unseen smaller companies that lurk beneath the surface and for the most part do not reach the light of the media attention.

Obviously, the other significant event in the past few months has been the big “R” word - RECESSION. The only good thing about the swine flu was that it took the media attention away from the big “R”. It was probably also a good thing for face mask manufacturers, have you ever seen so many face masks. I understand that some international flights have been looking like a surgeon’s convention.

How can we not be aware of the recession when every retailer is using the recession as a theme for their marketing. It seems that we can’t buy a packet of crisps without being told that eating these crisps will be an antidote for the “recession blues”. Or recession proof your grocery bill by shopping with “X”.

The recession has however hit some companies hard and they need an antidote which is unlikely to come out of a packet of crisps. Companies such as IBM have assessed the damage that the recession has made to their balance sheet and are looking towards new growth opportunities.

Mark Loughridge, chief financial officer of IBM. "I go through a deal review every week," he recently told Reuters. The current environment provides a "fertile" hunting ground for acquisitions, he added.
Ari Balogh, Chief Technology Officer of Yahoo believes that current tech valuations are "amazing" when compared with their levels just a few months ago. “It's a good time to be buying now," Balogh told Reuters. Yahoo is in the process of acquiring some new companies. "I can guarantee you there will be some acquisitions," he said.

The second part of this year is expected to show an increase in the number of acquisitions and for the ECM sector this will undoubtedly involve the small to midsized companies in this market.
This could create many new opportunities and some of the more profitable smaller companies could gain considerable attention. However, in order to be a small giant they need to ensure that they are prepared for what the next 18 months is likely to bring.

Potential acquirers will often look at a business in a completely different way than existing management of the smaller companies in the ECM sector. By the time a company board decides that they are open to being acquired there are often many inbuilt issues with their business which stop maximum shareholder value being achieved. Some of the problems can also scare away “good fit” acquirers from a “Smart Acquisition” or merger.

Part of any good ‘due diligence’ process is looking at the weaknesses and risks associated with a business and deciding, is it an acceptable and mitigated risk?
The problem for management is that by the time, the acquisition process is commenced it is too late to fix these problems. If these can be identified early, many of the risks can be mitigated & built into a company’s business strategy. This is something that I will be banging on endlessly about over the next few weeks as Document Boss prepares to launch a new service that addresses this and many other closely related issues to the above. The factors that effect equity value are often not aspects of the business that can be changed in a matter of a few months. Historical data about the business also greatly effects value not just what is happening NOW!

Transparent attempts to increase profitability by cutting short term costs and the expense of long term success just prior to an acquisition are all to obvious. Such companies need to start thinking and behaving like a small giant well in advance of any M&A activity if they want to achieve GIANT returns. There may never be a better time for the smaller companies in our sector to shine but only if they learn to walk and talk like the big boys!