There are too many questions surrounding recent industry acquisitions. Lets take them in order.
SoftChoice pays $10 million for NexInnovations. Now, if this was a few years ago $10 million would be nothing for a $550 million reseller. After the first round of CCAA, NexInnovations shrunk to a $200 million company, which is still significant.
However, several resellers told me they were surprised at the $10 million. They estimated that it was a stretch at $5 million and that several of the key customers from NexInnovations had aleady lost faith in the company and moved. So, in essense, what were they really buying?
After talking to Nick Foster of SoftChoice, he believes that it will take a year to see if $10 million was a bargain price or not. He believes that if SoftChoice can retain most of NexInnovations’ customers they will be able to recover the acquisition cost.
But how much is enough to pay? Foster thinks the standard is eight times EBITDA (earnings before interest, taxes, depreciation and amortization), a non-GAAP metric that can be used to evaluate a company’s profitability.
Is that a true measuring stick? CDW was acquired for 13 times EBITDA, Foster said.
Then there is Dell and its acquisition of EqualLogic. According to Dell, the company agreed to a US$1.4 billion all-cash deal for EqualLogic. The Nashua, Mass.-based company was said to be overjoyed at the transaction.
EqualLogic is not a publicly listed company and therefore does not have to reveal its revenue figures. They announced plans to go public and offer an IPO through Goldman Sachs and Credite Suisse about a month ago. From that IPO they expected to raise about US$125 million. Those plans obviously were put on hold for the Dell deal.
One reliable source in the Canadian channel pegged EqualLogic’s revenue between US$68 million and US$90 million. If that is the case, then Dell foolishly overpaid for this company.
DataMonitor, a UK research firm, reported that they were surprised by the purchase because EqualLogic has an annual revenue run-rate of around US$140 million.
Again, these are all unconfirmed figures. What was confirmed was that Dell, with the purchase of EqualLogic, made the largest cash deal for a venture-backed start up, according to the National Venture Capital Association.
Peter Hatges and Doug MacKay of KPMG Corporate Finance, two M&A experts, said at the CDN Top 100 Solution Provider educational session earlier this year that three-times revenue is the standard in coming up with a purchase price. They added that, while that is the norm, deals such as the Google acquisition of YouTube have changed the dynamics.
But given that measuring stick Dell should have paid no more than US$600 million for EqualLogic.
Then again, did IBM overpay for Cognos? They spent US$5 billion for the Ottawa company. Revenue for fiscal year 2007 was $979.3 million, compared with $877.5 million for the previous fiscal year, an increase of 12 per cent for Cognos. After six months, Cognos grew the business by nine per cent. Maybe it is time to change the measuring stick.
