InsightaaS: One of the "must read" documents that comes to my inbox is the quarterly newsletter published by Veracap, a Canadian firm that works on private company mergers, acquisitions and financings, and which maintains an index of publicly-traded Canadian TMT (technology, media and telecommunications) firms with market caps of $10-$500 million. Distributed by Derek van der Plaat (who also publishes in his own Private Company Mergers and Acquisitions site), the Q4 newsletter opened with a review of how the TMT firms included in the index have fared since January 2013 ("up approximately 60%,compared to a 20.3% increase for the S&P/TSX Composite Index"), and then moved on to a fascinating piece on acquisitions.
van der Plaat begins by ackonwledging that tech M&As often fail, but then looks at four Canadian firms - Constallation Software, Decartes Systems Group, Enghouse Systems and OpenText Corporation - that have a track record of building value from acquisitions. A table near the beginning of the piece captures the total number of acquisitions since May, 2006 for each firm (106, 25, 20 and 21, respectively) and then drills down into the cost of the acquisitions and the change in enterprise value that the firms have experienced over this time. Cumulatively, the acquisitions have had tremendous impact, with a expenditure of $5.2 billion translating into $8.6 billion in value created.
What has enabled these firms to capture financial benefit from these investments? van der Plaat observes that they have adhered to "a series of small, formulaic/cookie cutter acquisitions, rigorously held to reasonable valuations and payment terms." Returns will vary based on many different factors, but as van der Plaat notes, "what this overview tells us is that if you establish strict parameters around size and value and you do enough of them, you get pretty good at it.
There have been numerous studies on the difficulties of successfully completing acquisitions. Some studies note that 50% of all acquisitions fail. We won’t debate what is a success or failure and over what time frame it should be measured here. What we will do is review four leading Canadian software companies and examine their acquisition records. The four companies are Constellation Software Inc., The Descartes Systems Group Inc., Enghouse Systems Limited, and Open Text Corporation. We have reviewed the acquisition transactions where financial metrics were available for the period from May 18, 2006 (the IPO date of Constellation Software) to September 30, 2014 and the following [ed: table, included in the enewsletter linked below] summarizes the results.
The four companies had a combined Enterprise Value (EV) of $1.2 billion in 2006 which grew to $14.9 billion as at September 30, 2014, each generating double digit annual returns. The challenge in attributing this value creation to acquisitions is that not all acquisitions disclosed payment terms. Of the 172 acquisitions completed in total, 82 had disclosed financial terms. What we can assume about the acquisitions without financial disclosure is that they would have been relatively small. The Ontario Securities Commission requires the filing of a Business Acquisition Report (BAR) when the target size is greater than 20% of the pro- forma combined company. In looking at each company specifically, we discover a number of interesting metrics...