SciQuest Acquiring Unique Contract Management Asset Upside At Potentially Bargain Price

After market close today, SciQuest, a source-to-pay provider with existing contract management capability, announced it was acquiring Upside, a vendor that most analysts and consultants have long considered to be among the strongest functional providers -- if not the strongest -- in the contract lifecycle management arena. According to the announcement SciQuest has signed a definitive agreement to "acquire Upside Software, Inc., a worldwide leader in contract lifecycle management (CLM) solutions in an asset purchase for total consideration of approximately $22 million in cash, net of cash acquired."

The acquisition is expected to close quickly, at least as transactions such as this typically go (in our experience). Specifically, "SciQuest anticipates that the transaction will close within two weeks, subject to customary closing conditions. The solution combination should drive some excitement in the integrated source-to-contract-to-settle space and could portend a very savvy move by SciQuest, especially considering what appears to be a below-market valuation.

Looking at numbers, according to the announcement, "SciQuest expects that Upside Software will contribute approximately $5 million to non-GAAP revenue for the remainder of 2012 and approximately $15 million to non-GAAP revenue for the full year 2013. The transaction is expected to decrease non-GAAP net income by approximately $0.04 to $0.05 per share in 2012 and to be neutral to slightly accretive to non-GAAP net income in 2013."

Assuming the deal closes in early or mid August, it would appear that SciQuest is forecasting what appears to be flat revenue for the remainder of 2012 at roughly $12MM in total (for Upside) and revenue that will be slightly up for 2013 at $15MM (for Upside). These numbers may be down from 2011, but this is not confirmed. This is curious, but may have an explanation (which would also explain the low valuation), in that Upside has traditionally sold behind the firewall enterprise software deals.

Because these types of transactions lack recurring revenue other than maintenance, this would in part explain the low valuation if enterprise software sales had slowed. Of course the upside -- pardon the pun -- for SciQuest is that Upside also sold its products in a SaaS environment, claiming a single code-base for both cloud and installed deals (not something we have independently verified).

Stay tuned tomorrow for complete coverage of the news. We'll be sitting in on the investor's call shortly and reviewing our past coverage and briefing/demonstration notes on SciQuest in preparation for a more detailed solution review for the Spend Matters audience. We'll even share a fairly recent product analysis of their solution from a comparative perspective that we carried out for a client going through a contract management selection.

But if you must ask for three summary bullets within an hour of the news hitting, here's our quick take:

  • The deal gives SciQuest a best-in-class contract management solution to incorporate into its suite (although given that Upside is built on .Net and SciQuest is built on Java, some platform reconciliation will be required in the integrated roadmap, which is something SciQuest is already focused on following its AECSoft acquisition) and upsell to customers (and vice versa)
  • SciQuest will be able to focus on SaaS sales of Upside, but will also have an installed software product as well (for those companies that demand a customized instance of contract management behind the firewall)
  • The valuation (at what looks like less than 2X top line) appears low given recent industry deals and financings. SciQuest may have gotten a bargain here -- it seems so on first glance, looking at revenue-multiples -- but there is likely a further story that will come out on the investor's call in a few minutes

- Jason Busch

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