Tuesday, 24 March 2009

Private equity starts to target software companies again?

With many listed software companies shares prices hammered over the past months, there is no surprise that private equity has started to target these companies. In the Public Sector market, these depressed share prices and company valuations are likely to lead to more consolidation of suppliers (e.g. by the likes of 3i behind Civica, or KKR behind Northgate).

I’ll cover other companies in later posts, but looking at today’s news....

The Innovation Group receives bid

Ok – TIG is not really into the supply of public sector software, but it is a well known, listed software supplier with a chequered history, that has had some very well known names on its board (the most recent being Geoff Squire who resigned as Chairman recently).

Its share price had dropped from 55p in 2005 to 20p last year on the back of reduced profits, only to be hammered down to just over 4p recently following December’s announcement that it was being sued by one of its Canadian customers for £42M.

Now it is on the receiving end of a
potential offer of 15p from the private equity group Carlyle, valuing the company at c £100M – offering to complete due diligence in the next two weeks, but placing a pre-condition that the legal case be defeated by TIG....

The interesting hook is the timing of any court cases ... “Carlyle said that it could complete the first round of due diligence in two weeks and that its cash offer was subject to Innovation defeating a C$75 million (£42 million) lawsuit from Allstate, of Canada.” Clearly, if this case is to go to court (and possibly appeal) it will take years to get a court decision. So what are the options?

Firstly, I guess that the purchase price is discounted by all or part of the potential £42M claimed – leading to a bid price of around 8p (perhaps explaining why the current share price is only around the 7.5p mark).

Next, the Board is encouraged to agree a quick settlement with the customer out of court – say agreeing to pay £10-20M – personally I think this is unlikely – having been in such a situation before, senior management will be firmly entrenched in a “we will win at all costs” mode rather than a pragmatic “let’s get out of this as quickly and as cheaply as possible” mode.

The most probable scenario is that the case remains open, and the £100M offer is discounted by, say, 20% to cover a potential settlement (which the new owners are more likely to look for, to enable them to clean up their acquisition). So the current 15p offer drops to, say, 12p. (Or there is the risk that Carlyle do not bid at all).

The other option is that another bidder appears who is prepared to make an offer without any conditions on the legal action (except that his price will reflect whatever discount the current bidders have applied against their 15p bid). Then a bidding war might break out, without any pre-conditions.

If you are a shareholder like me, then I think it’s time to sit tight and see what happens – the bidding war would result in the best price, but without it, I’d bet on at least 12p from the current bidder.

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