Monday, 14 January 2008

Goodbye Coda?

Coda has received a bid valuing them at c£158m from Dutch software house Unit4Agresso. The bid, at 205p, was at a 20% premium to Friday’s close.

Anyone who claims “I told you so” concerning any prediction they might have made concerning consolidation in the financial accounting software market would be about as prophetic as a forecast of rain in England in the month of January. I reckon there has been more M&A in that sector over the years than any other. The UK used to boast hundreds – if not thousands – of such companies all providing their peculiar proprietary accounting systems. I haven’t got long enough to list them all. Indeed my first real M&A experience was back in 1980s when I was a non exec. of BOS Software which then got acquired by Misys in 1988.

One of the great attributes of financial accounting system suppliers is that once companies install systems they tend to stay…for ever. I remember a piece of research a few years back which showed that 39% of all such systems were originally installed 10+ years ago and another 29% 6+ years ago. In other words 68% were 6+ years old! On top of this, maintenance and support revenues are stable, predictable and provide positive cash flow.

For this reason, financial accounting system suppliers have made fertile acquisition targets. Some people believe that these companies are acquired so that customers can be moved onto the acquirer’s software. But, even if this does eventually happen, it happens very slowly. If you tell customers that they are going to have to change their software they might as well look at what else is available – the last thing you want! That’s why one can often find a consolidator being landed with many different disparate systems to support.

A look through the Top Twenty suppliers of financial accounting systems to the UK market just five years ago shows half of them have been acquired. Oracle has bought several of them. One of the last of the independent ‘majors’ to go was Systems Union (who had themselves acquired quite a few UK accounting systems providers like Pegasus) being acquired by Extensity/Infor in 2006 for £220m. Given revenues of £113m and PBT of £16.5m, the multiples at that time were considered pretty good! The market is now dominated by really large companies like Sage, SAP, Oracle and Microsoft (the dominant company depends on the size of system/customer). The only ‘independent’ now left in the top echelons is Cedar Open Accounts (COA) – the Alchemy-backed company. I am sure that my friends at COA/Alchemy will be looking at the Coda valuation with great interest!

As will the market... Some think that Unit4Agresso is getting a bargain and that a rival/higher bid is possible/likely. Given that Coda shares closed Monday at 197p – it doesn’t look as if the market agrees. Compared to the Systems Union deal in 2006, these multiples are much better across the board. A P/E of 19 based on 2007 figures looks pretty good to me! As it looks as if the process is quite advanced and, in today’s dodgy economic climate, “a deal in the hand…” and all that!

From a business logic viewpoint, the deal is a no-brainer. It enables two companies with limited international capabilities to gain critical mass in a number of overlapping geographies. In the UK and Benelux, in particular, both companies have sizeable operations and therefore the combined operations will be a considerable force.

I predict with certainty that I will be reporting further such deals throughout 2008.

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