As of today, we need refer to Sage Intacct as Sage today announced it is acquiring Intacct for $807 million in cash and rolled over stock options valued at $43 million for a total consideration of $850 million. Key members of the Intacct executive management are rolling a minimum of 25% of their proceeds into new Sage options, vesting in 12 months assuming continued employment - in addition to other retention incentives being provided. The deal is expected to close in a matter of weeks.
About the only surprise in this acquisition is the timing.
Founded in 1999, Intacct is one of the earliest of the pure play cloud financial management vendors but has had something of a rollercoaster ride, struggling in the mid-noughties but coming back strongly in recent times with CAGR in the 30-33% range. In May, Brian Sommer reported that:
- Total customer count now exceeds 11,000
- One customer now has over 600 legal entities in the system
- Another customer has over 3,000 users
- Another customer processes over 1,000,000 transaction line items per month in Intacct
- 34% YOY growth in new bookings
- Substantial in-fill sales to existing customers (i.e., sales of new modules and expanded user counts/subscribers) – this increases Average Customer Recurring Revenue
Today's announcement broadly reflects what Brian heard a few months back except for one thing. Brian thought:
While I expect Intacct to do an IPO before long, the market for such a transaction is not very hospitable on Wall Street these days. Debt financing is still a low cost option for now. This funding method will likely get more costly before too long. Now is the time to lock in cheap debt.
Sage must have heard the same thing because on the analyst call, the company claims that even with additional debt of some $600 million needed to close out the deal, it only expects to raise interest charges by some $10 million pa. The difference is that Intacct eventually succumbed to Sage's advances, which we are told, have been in the works for more than a year.
This is a very good deal for everyone.
Intacct gets close to top market dollar for its IP in the sense the sale price is equivalent to around 8.8x revenue, a price it could not get in today's IPO environment. Intacct customers get the backing of a much larger brand with R&D resources to match.
For its part, Sage gets a solid infill acquisition that sits between SageLive and X3 and can now legitimately claim to offer 'the only cloud based financial management solution you will need from startup to enterprise.' How well that carries as a message remains to be seen but for existing customers on Sage 50 that are considering an alternative cloud solution, Sage now has an answer where the discussion can be held at the CFO level and backed by solid relationships among the various American CPA chapters.
Taken together with Sage's acquired Fairsail (Sage People) and Compass (analytics and benchmarking), Sage Intacct as the company is already calling it, provides Sage's channel with a compelling set of applications that can compete in the fragmented and underserved mid-market that we have discussed many times in the recent past.
On the call, Sage management were clear that they are focused upon organic growth but that argument is a stretch when weighed against acquired technology and the contribution those acquisitions are expected to make in the coming year or so. But as Stephen Kelly, Sage CEO said on the call, this acquisition gives Sage partners something fresh to put in their keykit bags while helping Sage to achieve better brand positioning in the U.S. a geography where Sage's visibility has been swamped by market leader Intuit.
I was pleased to hear Kelly say that over time, Sage will use Intacct as a way of expanding into Sage's traditional English speaking language markets. Intacct has long chosen to ignore much outside the U.S. There will, of course, be some rework required for local legs and regs but the way Sage is talking, there is plenty of time for them to get their feet under the coding table.
It is easy to be critical of vendors that use their legacy cash cows to get themselves out of development jail through acquisitions. But then one of the reasons you can never discount market behemoths is precisely because their bulk allows them to do things that competitors cannot contemplate.
As in the past, Sage is bolstering its portfolio in a manner that is tried and tested for the markets it serves. This time, Kelly's expansive vision takes the company onto a different course, requiring that Sage R&D continues to work on integrations to not only its own products but adjacencies like Salesforce. My understanding is that Sage's technical teams are well on the way to understanding what's required.
It is interesting to note that on the call, Kelly made the point that Sage is in something of a transformation itself, referring to the situation three years ago in the U.S. when the company had virtually nothing to offer the channel. We saw that too, noting on successive earnings calls that the company seems to have little idea how to respond to the changing conditions. Kelly's strategy up to this point, which includes a focus on execution discipline and a firm steer in the direction of cloud technologies seems to be working. The fact Sage has spent the last year conserving resources for the time when a high priced M&A came available has certainly stood it in good stead.
It's what happens next that matters. With $43 million held up in options but a lot of IP to pass over, Intacct management is not going anywhere any time soon so there will be no bolting for the door for at least a year. My guess is we will learn by then whether the bets Kelly and team have placed were worth the price they've asked their stockholders to pay.
My only nit is with some of the positioning. On the one hand Sage talks 'start to enterprise' on the other hand it talks best in class. Both can go hand in hand but our experience suggests customers in the small and mid-sized markets want a single throat to choke. If Sage can move those same customers from one product to another without significant disruption either in terms of implementation or UI training then Sage will have pulled off an important trick. If not, then it will still have to compete much as it does today.