EQT identified the European software sector as an interesting space for investment some years ago.
“It's a sector that fits the criteria we're looking for: there's underlying growth and it's relatively non-cyclical,” says Per Franzen, a partner at the firm.
“We believe EQT has a very good governance and ownership model. EQT can create the most attractive risk-adjusted returns by minimising the level of external risk that we take, i.e., trying to avoid very cyclical industries, and instead focus on value creation and create returns that way.”
The firm conducted a thorough screening of the sector in Europe. Franzen says there are not that many sizeable targets within the space, but the search did identify an Austria-based workload automation business called UC4. At the time the business was owned by Carlyle Europe Technology Partners and founder Franz Beranek, and was posting sales of €62 million.
As well as being in an attractive sector with opportunities for both organic growth and market consolidation, UC4 was outperforming others in its space on customer retention.
“The software space in general is a fairly resilient and pretty sticky business, but even for a software company UC4 had off-the-charts retention rates,” Franzen says.
“We called around some of the larger customers and they were all extremely satisfied and confirmed the unique technology and strong engine of the company.”
EQT acquired UC4 in 2012 in a deal valuing the business at around €220 million.
1 STARTING AT THE TOP
The first thing on EQT's to-do list post-acquisition was to put together a new board of relevant people for the various work streams and value-creation opportunities that had been identified. The firm brought in former QlikTech chairman and CEO Mans Hultman for his knowledge on sales force effectiveness and former Microsoft Sweden head Jonas Persson for his product know-how and to focus on research and development. Vagn Sorensen, who had been chairman of several EQT portfolio companies, came in as chairman to drive the firm's industrial agenda and operational improvement programme.
“We, together with the management team, produced a full-potential plan to change the mindset in the company and drive sales force expansion more aggressively,” Franzen says.
It became clear that to drive the more ambitious agenda, changes were needed at the top; during its ownership, EQT brought in a new CEO, Todd DeLaughter, and a new chief sales officer and chief marketing officer to implement the outlined value creation plan.
2 FIRING UP THE FORCE
The major organic growth opportunity was to invest in aggressive sales force transformation, especially outside the German-speaking countries where the business had been historically very strong.
“We saw a big opportunity to do more in North America,” Franzen says.
EQT invested in upgrading and extending the sales force, especially in the US market. It is understood that during EQT's ownership, the number of full-time employees increased from around 270 to around 560, and sales productivity increased by 60 percent. Automic's revenues went from €62 million in the 2012 financial year to €132 million in the 12 months to October 2016.
3 TRANSFORMATIONAL M&A
As part of the due diligence process, EQT identified two or three consolidation targets of substantial size that would transform UC4 into a more global business.
The most significant of these was Paris-based Orsyp, an IT automation and optimisation solutions business. Focused on France and with a good market position in Canada, Orsyp was geographically complementary to UC4.
“The transformational add-on acquisition of Orsyp helped us achieve a completely different level of scale and profitability compared to when EQT entered the company,” Franzen says.
The integration of Orsyp brought substantial synergies and improved the company's margins from 23 percent to 32 percent.
During the investment, EQT also completed two small technology 'tuck-ins', acquiring a team of engineers to help with product development and to build out some of the functionality relating to SAP.
Having merged the two businesses, EQT rebranded the new combined entity as Automic and took the opportunity to reposition the business to appeal to a broader, more high-level customer set.
“By rebranding the company to Automic we wanted to signal to the broader software community, the customers and the employees that Automic wants to become a global leader in this automation software category,” Franzen says.
The idea was to take a previously IT-centric business that sold its products primarily to IT specialists within companies to automate certain processes such as invoicing systems and turn it into a business process automation company that could help clients with more complex processes such as, for example, customer on-boarding at a telecoms business.
“By lifting the conversation to the more executive level and helping the customer understand the business benefits of your technology, you can point to the savings that you can achieve with this technology,” Franzen says, pointing out that automation not only reduces costs but improves quality and minimises human errors.
“That then runs into several millions of euros in terms of business value per year.”
The firm had been approached on several occasions with expressions of interest, particularly from strategic buyers. EQT declined to comment on financial details but it is understood that following the implementation of the bulk of its value-creation plan, Automic's EBITDA had tripled from €14 million to €42 million.
“We had set ourselves a clear minimum value target under which EQT was not prepared to sell,” Franzen says.
That led to a limited process which ran in the second half of 2016. The winning bidder was strategic buyer CA Technologies, which agreed to acquire Automic in December 2016 in a deal valuing the business at €600 million.
A source close to the deal told PEI the sale price represented a 16x EV/EBITDA ratio, delivered a gross money on investment capital of around 3.2x and an internal rate of return of about 30 percent.