Monday, August 22, 2011

Is Sage a Listed Private Equity Firm?

I was wondering what the implication was for Sage having being beaten by Bain to the MYOB deal. MYOB (for those unfamiliar) is the equivalent of Sage in Australia.

Accepted wisdom among Sage watchers is that they are a very disciplined buyer and therefore tend not to get into bidding wars with private equity firms.

We have seen examples of this previously when they missed out on Visma (acquired by KKR from Hg Capital et al), and TeamSystems (acquired by Hg Capital, sold by Bain).

The problem with my opening axiomatic comparison between Sage and PE as buyers, is that in my experience the opposite is generally the case. We normally expect that strategic acquirers (Sage, Cisco, Oracle, SAP etc) tend to be able to justify a higher price than PE firms (Hg, Bain, KKR etc).

The reasons for this are fairly simple and boil down to the ability of strategic acquirers, particularly if they are global companies, to gain significant strategic synergy, rather than the pure financial synergy and financial engineering that you would expect from the private equity firms. These synergies might include consolidation of sales, products, core technology which cannot be achieved by a pure financial acquirer.

Perhaps then we need to rethink the category that we place Sage into. They are clearly a global player in the SME software market with important share in all of the key markets (excluding Asia). However when we look under the bonnet what we find is that the federated nature of the set-up gives it some of the characteristics of a more "financial" player. Without going into detail it is clear that relative to other global tech players Sage is really a collection of leading domestic businesses. There is little or no genuine global product range (Sage ERP X3 is a recent attempt) and certainly no integrated global sales and marketing operation.

I want to make clear that this is by no means a criticism. This federated view of the world has long been a pillar of the Sage strategy, mainly resulting from an early realisation that in the realm of small business accounts and business software, local knowledge, tax and regulation is absolutely crucial and has lead to a strategy of acquiring local market leaders and implanting to the extent possible the Sage model of high recurring revenues. The main synergy arising is based on the success of increasing the percentage of acquired customers to long term maintenance contracts, somewhat different to the story you will see when an IBM, Oracle or SAP carries out an acquisition.

On the flip side this is also the main reason why Sage has only on a very limited basis made "technology" acquisitions. Again in the IBM/Oracle/SAP world acquiring technology is done on the basis of the leverage they can achieve by taking a proven technology and using the global sales distribution to greatly accelerate the growth in the acquired company. On the basis that Sage does not have a globally managed sales and marketing operation, there is little point in paying inflated prices for technology, as they have almost no way of leveraging the acquired technology. Given that a high percentage of these acquisitions do NOT yield the expected strategic returns, it follows that this is not necessarily a bad thing for Sage and its shareholders.

There is some chatter in the financial markets that Sage's institutional shareholders showed cool interest in the MYOB deal, notwithstanding that management had not had a chance to present the pro's and con's. If true, then this in itself is a little disappointing and suggests that the company and the new management leading it have some work to do to establish confidence in their ability to execute the type of deal that MYOB offered. (Some 21st century investor relations might help!)

If we are to follow the thesis that Sage is a private equity firm, then I would suggest that they do what the great PE investors do, which is to sell assets as well as acquire them (well over 100 since the IPO in 1989). I am sure that there are a couple of operating companies that could be identified for sale without wishing to state the obvious and this would go some way to showing that Sage understands that value creation can be achieved by realising assets as well as acquiring them.

There are few companies in the UK tech environment that have managed the type of success that Sage has!! Their discipline has been a great asset and although it means that they will miss out on deals like MYOB, it also means that they have almost never disappointed their shareholders.

The press has quoted numbers for Bain's MYOB offer as 13.5x EV/EBITDA on a trailing basis. Sage currently trades in London at less than 8x EV/EBITDA. What can Sage do to garner something close to that valuation. Holding companies typically trade at a discount. Perhaps Sage needs to find a way to break this image that it has gained over the years.

How then does the group management leverage this asset going forward to keep it growing in the absence of financially attractive acquisitions? Answers on a postcard!


  1. Another post on the story by Accman -

  2. Daniel,

    I am not entitled to comment on your thorough analysis of Sage but I wanted to reinforce what you outlined regarding Sage ERP X3 as a global initiative at Sage.

    We are enjoying a lot of success and growth with this business worldwide even during the downturn where our software growth between 2008 and 2010 was of 32% for Sage ERP X3 globally.

    We're continuing to invest heavily in a global organization covering Sales, R&D, Product Management, Marketing & Communication, professional services and support.

    You can relate to the announcements we placed back on May 26th here to find out more about it.


    Emmanuel Obadia
    Sr. Vice President, Enterprise Products
    Sage ERP X3