Proactis Buys Perfect Commerce – Further Thoughts

On Friday, Wetherby-based* procurement software firm Proactis announced the transformational acquisition of US / France firm Perfect Commerce. Proactis has made 5 acquisitions in the past 3 years (EGS, Millstream and Due North in the UK, Intesource and Intelligent Capture in the US) but this is a different scale altogether, representing a more than doubling the size of the business.

We gave the headlines on Friday here, but the new business will have revenues of approaching £60 million, 1000 enterprise customers, and around 450 staff. That propels them into the top half-dozen or so of procurement tech firms, not far behind the leaders really.  And when you look at profitability, that ranking is probably higher. Proactis made almost £2 million operating profit on revenues of £19M last year and has delivered very decent shareholder value in recent years. £1,000 invested 5 years ago would be worth over £9,000 now – not bad going!

That indicates the previous small acquisitions have been integrated successfully. But what is really a merger of similar sized businesses will be quite a different challenge. However, there are some clear potential benefits to the tie-up. For a start, the regulatory statement says the deal is “expected to be earnings enhancing in first full financial year of ownership” which is always a real positive for shareholders.

Geographical strength is also complementary with Perfect strong in the US, Australasia and continental Europe (they acquired France-based Hubwoo a couple of years back). Proactis has UK strength and a presence in the US and Benelux. Proactis has typically done well amongst small to mid-sized public and third-sector clients and mid-sized private sector firms, whereas Perfect’s client base is typically tier one and two major firms with a presence also in larger US government bodies.

In terms of product, there is some overlap in sourcing and purchase-to-pay areas. But the Perfect Commerce (Hubwoo) business network is a big attraction, being one of the largest in the world. It opens up options to grow revenues from the supply side as well as from the buy-side.

London will be the HQ, with Hampton Wall from Perfect as CEO and Tim Sykes from Proactis as CFO, and “the firms seems very much culturally aligned”, Simon Dadswell, the Proactis Marketing Director told us, although only time will tell how deeply that alignment runs. There will be some rationalisation around management costs, IT and back office, with a saving of around £5 million a year, according to the regulatory documents. That is quite significant and would be a substantial boost to profit if the firm can make it happen.

It is not clear yet what the technology road-map or strategy will be. Dadswell told us that the integration work has not started and it is worth pointing out that this whole deal is still subject to shareholder agreement, although the reaction to the placing of new shares has been very positive and it seems likely that this will be given.

What Dadswell did say was that the combined product portfolio going forward must maintain “happy and profitable” current client groups, some of which have quite specific needs. So we can maybe interpret that to mean we aren’t going to see any dramatic announcements about a whole new integrated common platform within 6 months or anything of that nature.  We suspect this will be a cautious path to integration from a customer perspective, whilst the firm perhaps drives harder on those synergies and savings in overheads.

Proactis has been pursuing a clear strategy for the past three years or so. The first objective was a market capitalisation of £100 million, which was  achieved briefly earlier this year; as we write this (Friday 7th) it stands at £96.21 million. The next target is £100 million in revenue. Assuming the firm progresses as planned, that could come fairly quickly with growth and potentially further acquisitions. Of course the beauty of having a stock market quotation is that as long as you keep satisfying shareholders, your ratios improve and your paper (shares) become a great currency for acquisitions that can further enhance earnings.

There are still hurdles ahead. The actual products are not all market-leading, and integrating two substantial firms is never easy. Talking about cross-selling is easy; getting sales people who have promoted the Proactis product for years to become experts suddenly in Perfect Commerce propositions is not straightforward. Managers seeing favouritism towards people from one firm or the other as new structures are put in place can cause dissent in the ranks.

But these are all addressable issues. Overall, as we said on Friday (and forgive me the English football analogy) this move takes Proactis and Perfect Commerce from near the top of the Championship to being a real Premiership team - perhaps even challenging for a Champions League place!

* We won’t be able to say this for much longer. It has become a bit of a standing joke with the Proactis team that we always say “Wetherby based” when we write about them – purely because I love the fact that a serious player in our software market is based in the lovely Yorkshire town (see picture above) rather than London, Munich or California. But the “new” Proactis will have a London head office, we are told.

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