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Will SS&C's Recent Acquisitions Pay Off?

By Luis Sanchez CFA - Sep 24, 2019 at 8:35AM

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Let's see how three bold 2018 acquisitions are working out for shareholders.

SS&C Technologies Holdings ( SSNC 2.58% ) makes software to assist investment-management companies with supporting functions such as accounting, client reporting, and regulatory reporting. In other words, SS&C is a boring company -- but boring is sometimes better when it comes to finding good tech stocks to buy.

The company has strong long-term growth fundamentals due to the trend of financial institutions outsourcing IT functions. SS&C has also taken steps to juice its earnings growth by aggressively acquiring three companies in 2018, taking on a significant amount of debt in the process. Will these acquisitions pay off for shareholders?

Person using laptop to analyze stock market data.

Image Source: Getty Images.

A skillful acquirer

SS&C has earned a reputation for being a smart shopper over the years. The company is still run by its founder, Bill Stone, who launched it from his basement in the 1980s. Under his leadership, SS&C has gone on to acquire more than 50 companies in the last 25 years -- each time gaining additional scale and earnings power.

And SS&C has been able to make good businesses better. The graphic below, taken from one of the company's recent investor presentations, shows how SS&C has been able to improve profit margins at acquired companies. Even at large, public companies like Advent, which traded with a multibillion-dollar market valuation, SS&C was able to find cost savings.

A chart showing prices paid for acquisitions and margin improvement

Image Source: SS&C investor presentations.

By using cheap debt to finance deals and improving acquired companies, SS&C has been able to successfully execute an acquisition-led growth strategy. The good news is that founder-CEO Stone, who oversaw the company's past deals, is still running the show, which gives investors a reason to bet on a continued ability to execute operationally.

Three 2018 acquisitions

Although SS&C has historically been quite acquisitive, it is possible that the company bit off more than it could chew in 2018. It spent a total of $8.4 billion acquiring three separate companies, racking up nearly $8 billion in debt in the process.

Acquisition Date Acquired Business Purchase Price Description
April 2018 DST Systems $5.4 billion Asset-management software
October 2018 Eze Software Group $1.45 billion Trading software
November 2018 Intralinks Holdings $1.5 billion Client-communication software

Data Source: SS&C financial reports.

Each of the acquired businesses brings strategic value and synergy to the company's existing assets. DST Systems is primarily an administrator for mutual funds, which is similar to the administration services SS&C provides to other types of asset managers. Eze makes trading software that complements other trading software that SS&C offers. Intralinks is a dataroom provider heavily used by private funds for client communications. This represents more of a cross-selling opportunity, because SS&C has a deep client base of hedge funds and private equity funds.

The kicker is that SS&C projects that it can achieve $300 million in cost-saving synergies from its DST Systems acquisition and an additional $45 million in earnings improvement combined from the Eze and Intralinks businesses. These figures represent massive margin improvement (nearly doubling DST's earnings) that would clearly make the acquisitions more rewarding.

Assuming the company can achieve its margin-improvement targets, the remaining question is how quickly it can pay off the debt it has accumulated. There is more good news in this regard. SS&C's businesses generate healthy cash flow, and the company was able to pay off $415 million in debt during the first six months of 2019 alone -- using virtually all of its excess cash flow.

Of course, SS&C has been here before with acquisitions, and it has proven time after time that it has a strong ability to improve acquired businesses and rapidly pay down debt.

A mixed outlook

While investors have good reason to bet on SS&C's ability to execute on its acquisition-driven strategy, the company's stock price was volatile in 2018 due to a combination of issues.

On the deal front, SS&C has commented that it is on track to achieve its cost synergy goals; however, it has lost some clients at DST Systems, hurting top-line results. Furthermore, weaker financial market conditions in 2018 led to growth slowing for SS&C's business more broadly.

Perhaps the recent issues present a buying opportunity in the stock. If the company is able to move past the recent client losses, deliver its targeted margin improvement, and balance all that against debt reduction, SS&C's recent acquisitions are almost sure to pay off handsomely for shareholders.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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