Since 2003, Onyx Software's
Since 1994, Onyx has developed customer relationship management (CRM) software for major customers such as AIG
M2M Holdings is jointly owned by two private equity firms, Battery Ventures and Thoma Cressey Equity Partners. Such firms look for undervalued companies, whether they're public or privately held. In a typical transaction, they will invest 10% to 20% of their own capital for a purchase, then borrow the rest, usually in bank debt or even junk bonds.
Why the buyout?
So what's the attraction of Onyx? Its financials still appear weak, with first-quarter revenues falling from $14.1 million to $12 million, accompanying a net loss of $2.2 million.
Despite this, Battery and Thoma Cressey have agreed to shell out $92 million in cash for the company -- causing the stock price to jump 13%. Why? For one thing, Battery and Thoma Cressey have experience in consolidating slow-growth industries. They tend to buy up a variety of related companies at low valuations, which lets them cut out duplicative expenses, merge customer accounts, and even cross-sell to a larger customer base.
For example, M2M Holdings previously purchased Made2Manage Systems, whose enterprise resource planning (ERP) software helps companies manage payroll, inventory, and invoicing. Made2Manage has more than 2,200 customers, all of whom could be prospects for Onyx's solutions.
In addition, Onyx has an enticingly steady source of revenue. It sells its software by charging an upfront license, followed by a yearly maintenance fee, which generally ranges between 15% and 20% of the initial license. Because customers are reluctant to switch complex products like CRM software, Onyx's maintenance revenue is fairly secure. In the first quarter, revenue from new license sales fell from $3.8 million to $2 million, suggesting that the company is having difficulty finding new customers. However, revenue from recurring service fees fell only marginally, from $10.1 million to $9.9 million.
More to come?
Private equity deals have recently flourished in the enterprise software industry. In late May, Symphony Technology Group offered to buy Hummingbird Ltd.
Also in May, ERP software provider Infor made a $1.4 billion purchase of competitor SSA Global
Given private equity firms' well-funded coffers, and the thousands of small and midsize software companies having difficulty finding growth, it's reasonable to expect consolidation to continue. Such deals will probably be the main way these companies provide returns to their shareholders.
Further enterprising Foolishness:
Reap powerful profits by investing in companies unfairly marked down by the market. Philip Durell's Motley Fool Inside Value newsletter service can teach you how. Sign up today for a free 30-day guest pass.