Wednesday, 17 September 2008

After Anite and IBS – where’s the next big acquisition?

The market for software suppliers to the UK Public Sector has seen some considerable consolidation recently. With Northgate’s and Capita’s acquisitions of Anite’s Public Sector Division (assuming it goes through later this month) and IBS respectively, who’s next or – more importantly – who’s left?

The one touted about in the press most is IDOX – a company that has itself grown through acquisition (recently of CAPS and Plantech) into the market-leading supplier of systems to local authority Planning and Land Charges departments. My opinion is that IDOX is unlikely to survive as an independent company for more than the next couple of years before it gets gobbled up itself. I suspect that the sole reason that it hasn’t been acquired already is that the big players have been competing over the more-important consolidation of the Revenues & Benefits market (IBS and Anite PS).

Now the likes of Capita and Civica may turn their attention onto IDOX (Northgate – as the second largest supplier of planning and LC systems would not, I believe, be allowed to acquire IDOX). The delaying factors are likely to be the current credit crunch and IDOX’s Directors’ likely valuation of their business – it may be that potential acquirers sit on their hands for a few months to see how IDOX copes with the integration of CAPS and Plantech, hoping for a hiccup and perhaps a reduction in valuation – let’s wait and see.

Another listed company is Gladstone (GLD) – suppliers of leisure centre systems to both local authorities and commercial operators – and starting to broaden its market into the education sector. Although relatively small, in April Gladstone had a major new investor taking 29% of the business (Constellation Software – a Canadian company, listed on the Toronto Stock Exchange), at 25p per share - with the current SP now around 20p (with a forecast of 4p EPS and 9p cash) and a market cap of around £10M (with £4M in cash on the balance sheet at 29 Feb 2008). Revenue is growing slowly and consistently, with current annual revenue around the £9M mark.

Gladstone had problems during the boom, but those problems seem behind them now. They have a new NED in Robert Critchlow, who in the 90’s was CEO of Tetra when it was listed on LSE in 1997 and subsequently acquired by the Sage Group in1999.

In my mind, the one downside is the leisure centre market – from my time with the leisure centre system RELACS, the customer base was typified by low budgets, high staff turn-over, with inexperienced users, and a consequently high support workload. But Gladstone is now the market leader, seems to have support under control, and is moving well into both e-delivery and the new market area of education. I believe that they will be successful as an independent company, but with the big players looking to grow even more, I suspect that Gladstone will be on at least one player’s shopping list.

Two other possible companies are in the e-procurement area – Proactis and @UK. Both have totally different business models, Proactis the more conventional software product and services model, and @UK a SaaS model based on using local authorities to help them provide e-commerce services to local suppliers.

Proactis has totally changed under the leadership of Rod Jones (ex-Ross Systems) since 2002. Now employing a sales model incorporating both direct and indirect sales, growing through a couple of small acquisitions, and moving into an international market, Proactis had an annual revenue of c £5M in the year to end July 2007 – but has since issued a profit warning and now expects to return a loss in the year to July 2008 – quoting delays in the integration of its two acquisitions and a slowdown in Public Sector sales. Its share price has responded by dropping to c 19p and a market cap of around £6M.

@UK is a totally different kettle of fish. Floated on AIM in 2006 its share price has declined from over 60p to virtually nothing. The £8M raised in the flotation has been nearly all burnt away and at its current share price of around 3p, @UK has a market cap of just over £1M, with annual turnover £2.3M and a loss of £2.2M in 2007 (loss £3.2M in 2006). @UK lost its CEO, Grant Oliver earlier this year (the FD has stepped up to take on the CEO role), and an annual profit seems years away.

My own belief is that pure-play e-procurement companies are unlikely to survive long term – no matter how good their products, in the longer term most customers will look to buy procurement systems along with their financial and/or other systems. Personally, I think @UK’s business model doesn’t fly. Although my company Radius actively partnered with @UK a few years ago, when I was given the opportunity to invest in @UK before its flotation, I declined because of my concerns over their ability to get into profit.

I had similar concerns about Proactis but, current profit warning aside, I think they will return to profit and longer-term are a likely acquisition target – most probably not for Capita nor Northgate as they lack suitable applications to partner with, but could prove interesting for Civica, Agresso (who recently acquired CODA, whose founder Rodney Potts is also a major investor and a NED at Proactis), or even Cedar (who recently acquired a small e-procurement company Belmin).

There are of course, a number of possible service companies that could become acquisition targets, but I’ll leave those for another post.

Note: I am a share holder in IDOX and Gladstone. This blog is not intended as investment advice – please DYOR (do your own research) if you intend to invest in any of the above companies.

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