British company Idox is planning to increase its revenue from £78-80 million to £100 million by next October – and it is planning to get almost half of that from its planned acquisition of local software company 6PM.
It is a bittersweet moment for the local company’s founder, Ivan Bartolo, who had described the news of interest in an acquisition to The Business Observer last spring as being akin to seeing a daughter getting married.
He had, however, no doubt that this was the best way forward for the company, saying that Idox’s size and geographic presence would allow 6PM to grow much quicker than otherwise.
“We could have grown on our own but we would have needed more financing,” he said.
There were various financing options 6PM could have pursued, the most obvious being another bond issue – which Mr Bartolo is convinced would have been successful since the company had become “a household name”.
However, he was very honest, admitting that he did not want to shoulder the responsibility of taking this quantum leap – and that being a fearless risk-taking entrepreneur was not the same as being a risk-taker that expands a company.
“It was a very different type of risk. Fifteen years ago, I had nothing to lose; now I have 175 employees. Now, the first question I ask is: ‘What if I am not successful? How would I repay the bond and the interest?’ This is like being on a relay team. The first runner is not necessarily the best one to run last, under pressure from the rest of the competitors…” he said.
“Maybe it is my age as well: I am not so sure yet of a succession plan. On the other hand, the best way to get into new markets like France, Germany, Sweden and Scandinavia is by acquiring existing companies who already have a presence in those markets.”
Once the company had accepted the concept of acquisition, the next question was which suitor to choose.
Mr Bartolo said that with the first company to approach them, there was no chemistry and it was evident from day one that it would not work.
“We went further down the line with one other one but again, it would have been more of an investor relationship than an operational one. It was not what we needed, which was an experienced company to help us go through the next growth evolution,” he explained.
This is like being on a relay team. The first runner is not necessarily the best one to run last
Once Idox had been identified, there really was only one way forward, he explained: full acquisition.
“It would have been harder to find someone unless the whole company was for sale. An institutional investor was not of interest but even they would not have come in unless they had at least 70 per cent of the shareholding.
“Anything less does not really work, as we learnt from other companies where we had anything less than full shareholding. We would not have invested in Blithe Computer Systems [in the UK] had we not had 100 per cent shareholding,” he admitted.
The tough work then started: The financial, legal, commercial and technical due diligence conducted by several teams has taken its toll on 6PM’s executive team as this was truly a demanding process. Apart from the £0.88 per share being offered (6PM reports in sterling), Idox will also retain all the 175 employees – and the current executive team, including Mr Bartolo, with a six-month notice option.
It would also delist the company, a blow to the Malta Stock Exchange which has already lost Crimsonwing and the Island Hotels Group.
The main shareholders have already committed their shares – almost 70 per cent – but the other 250 (approx.) shareholders have until January 24 to accept the deal, which will go ahead as long as it reaches 90 per cent approval.
“The core shareholders have said it is the best way forward and just as the other shareholders have trusted us for the past nine years, I think they will trust us on this.”
The offer sets a 10 per cent premium over the current share price. The only ones who could potentially have a grouse about the sale are those who bought into the company after the acquisition announcements was made, buying at an inflated £1, but Mr Bartolo is satisfied with the return for the vast majority of his shareholders.
“The original IPO in 2007 was at £0.67, followed by a rights issue in 2011 for £0.25. So those who bought in 2007 would have made a good return of at least 54 per cent, not to mention dividends, etc.
“Since the Vassallo Group invested in 2011, they got a 63 per cent annualised contribution. If you had to put it all together it would be more than 300 per cent. The other thing we have to bear in mind is that people do not have to sell all their shares: they can buy shares in Idox, which is on the AIM (the secondary listing) in London where it has an average turnover of 320,000 shares traded every day. We would possibly trade that amount of shares in Malta in a year!”
The acquisition comes at a very positive time for the company, which reported an interim gross profit of £3.88 million for the six months ended June 30, 2016, up from £2.31 million a year before (profit before tax £489,002 up from 2015’s £413,199).
However, apart from the huge investment that further internationalisation would have cost, there were clouds looming, ranging from the haemorrhage of staff to gaming companies being experienced by numerous companies in Malta, to the Brexit risk and the uncertainty of the sterling – all of which would be mitigated by diversification.
“The sterling exchange rate has cost us £300,000 this year, a lot of money for a company the size of 6PM,” he said.
Those who bought in 2007 would have made a good return of at least 54 per cent
So what exactly attracted Idox to 6PM? The company is very active in the public sector, providing solutions to half the police force in the UK – but they have barely any presence in healthcare. And Mr Bartolo explained that 6PM’s workflow solution would be of interest to the police force while Idox has electronic document solutions which 6PM currently have to get from third parties, so the relationship will work both ways.
Idox also has contracts in Europe, North America and Australia, with various overseas offices. But Mr Bartolo cautioned that things would not happen overnight and that the acquisition was being split into a transition phase, an integration period leading to full collaboration.
“But there is considerable respect and they are allowing us to set the pace,” he said.
With the excitement comes the twinge as he refers again to the company coming to marriage age “and needing to move on”. He shakes himself and smiles again: “In February 2001, this company started because someone dared to invest Lm500 (€1,165) from a bank account. Now it is worth over £18.6 million. We caught the attention of a huge listed company in the UK which came to buy us. And they are also taking on the bond, the creditors, the bank overdrafts – all the debt. So the enterprise value is what they are paying for the shares plus the debt.
“What a great story! We are an IT company performing on stage and after years of being at the Manoel Theatre, we have the chance to go to the Royal Albert Hall…”
6PM history
Mr Bartolo founded the company in 1996 and it now employs over 175 employees. 6PM Ltd was registered in 2001 and five years later 6PM Management Consultancy (UK) Ltd was set up in the UK by Alan West Robinson and Steve Wightman. The two companies were brought together under 6PM Holdings in 2007. During 2015, the 6PM Group acquired Blithe Computer Systems.
Today, the 6PM Group is made up of 6PM Ltd, 6PM UK, 6PM Macedonia, emCare 360 Ltd and it owns 70 per cent in 6PM Ireland, as well as other strategic investments: 22.5 per cent in Javali LLC (US) and 45 per cent in Javali Europe.