Australian small-cap software companies have been severely oversold and as a result have been swarmed on in a flurry of M&A deals during October, with few signs that these deals will slow down with more likely in the pipeline.
National and international software firms, as well as private equity firms, have taken advantage of these low valuations, offering huge premiums in an attempt to secure control of the companies in question.
Over the past week, Nitro Software (ASX: NTO), PropTech Group (ASX: PTG) and ELMO Software (ASX: ELO), have all been in the process of formulating acquisition deals, whilst just yesterday, ReadyTech Holdings (ASX: RDY) released a statement referring to recent media speculation about a potential transaction.
Nitro Software Limited (ASX: NTO)
In August, specialist private equity firm Potentia Capital submitted a non-binding proposal for the acquisition of all Nitro Shares at an offer price of $1.58 per share.
However, following careful consideration and advice from its external advisers, the Nitro Board decided to reject the proposal, believing that is significantly undervalues Nitro’s value.
In response to this, Potentia last week announced an off-market hostile takeover bid through Technology Growth Capital for Nitro Software Ltd at a price of $1.80 per share, a 59.3% premium to the $1.13 share price at the time that valued the company at A$430 million.
On the 31st of October, Nitro’s board once again rejected the bid on the basis that it still undervalued Nitro and was not in the best interests of the shareholders.
In addition, on the same day that it rejected Potentia’s second bid, Nitro announced that Canadian software company Alludo, which owns the Parallels, CorelDRAW, MindManager and WinZip brands, submitted a Scheme of Arrangement to purchase 100% of Nitro at A$2.00 cash per share.
If that’s not enough, Alludo has also offered an off-market takeover bid through a 50.1 per cent minimum acceptance condition, meaning that if Alludo manages to convince just over half of Nitro’s shareholders to accept the $2 price tag, it can control the company and would remain ASX-listed.
It is important to note that Potentia already owns 19.83% of Nitro and has made it clear they will vote against any competing bid for Nitro.
The board of Nitro has suggested that it would go ahead with the $2 offer if all the conditions are met, which may trigger an even higher offer from Potentia, or another interested buyer.
The current bidding wars between Alludo and Potentia has shot the price of Nitro up to $2.07 (as of 1/11/2022).
Proptech Group (ASX: PTG)
On the 31st of October, Australian real estate software company PropTech, announced that it was set to be acquired by U.S. realty technology firm MRI Software through a Scheme of Agreement, under which MRI would acquire all of PropTech’s shares for $0.60 cash per share, equating to an implied equity value of approximately A$93.4 million on a fully diluted basis.
This acquisition represents a premium of 131% to the closing price of 26 cents on the October 28.
The deal is likely to go through, with the Board of PropTech unanimously recommending that PropTech’s shareholders vote in favour of the Scheme in the absence of a Superior Proposal.
In response, PropTech Group’s Chairman Simon Baker stated, “the Board believes that the proposal received from MRI represents a compelling opportunity for PropTech shareholders to realise a significant premium to the value of their PropTech shares via the certainty of cash consideration and in a timeframe that would not otherwise be available.”
PropTech’s share price closed at $0.57 on November 1.
ELMO Software (ASX: ELO)
On October 26, ELMO Software announced that it had agreed to a takeover bid from Los Angeles-based software investment firm K1 investment at $4.85 per share for 100% ownership of the company, implying an equity value of $486 million.
The scheme represents a 100.4% premium to the closing price of $2.41 on the October 12.
Like PropTech, ELMO’s Independent Board Committee has unanimously recommended that ELMO shareholders vote in favour of the Scheme, in the absence of a Superior Proposal and subject to the Independent Expert concluding that the Scheme is in the best interests of ELMO shareholders.
Two of ELMO’s largest shareholders, JLAB Investments Pty Ltd and the Garber Family Trust – who between them hold 23.4% of ELMO’s ordinary shares – have confirmed that they intend to accept the bid in toto.
In response, ELMO Chairman Barry Lewin commented, “whilst ELMO has achieved considerable success to date in Australia/New Zealand and the United Kingdom, the IBC has balanced this against the macroeconomic and execution risks in achieving future plans and has unanimously concluded that the Scheme is a compelling option which realises attractive value for our shareholders.”
At present, the transaction is still subject to Foreign Investment Review Board approval, customary closing conditions, and shareholder and court approval – all of which must be satisfied before the scheme is implemented.
ELMO Software’s share price closed at $4.65 on November 1.
Yesterday, ReadyTech Holdings Limited responded to media speculation suggesting that it is in discussions concerning a potential transaction.
The deal is in early stages, with ReadyTech announcing that it has received a conditional, non-binding indicative proposal from Pacific Equity Partners Pty Limited (PEP), a leading Australian private equity firm, at an offer price of $4.50 per share.
This represents a 38% premium to the closing price of $3.21 on October 31.
ReadyTech Holdings Limited (ASX: RDY)
ReadyTech has also revealed that its majority shareholder – Pemba Capital Partners, who currently holds 31% of the company’s issued capital – will work with PEP on the proposition.
The Independent Board Committee has considered the proposal and has granted PEP non-exclusive access to non-public due diligence information to allow it to develop a more certain Proposal.
At the moment, the discussions are continuing, and no agreement has been reached between the parties in relation to the value, structure, or terms of any transaction. Management has also stated that there is no certainty that these discussions will result in an acquisition.
There are already hiccups however, as the company’s second-biggest shareholder Microequities Asset Management has expressed their early concerns of the deal.
“We have zero interest in selling the company for a 40% pop on its currently farcical mark to market price…We will strongly oppose such an approach” Microequities CIO Carlos Gil stated.
The group currently owns 13.17%, and yesterday, bought a further 711,666 shares at $4.12, strengthening their belief that the company is undervalued, as well as giving them extra voting power to oppose such a bid, with potential for other competitors to enter the bidding war.
Conclusion
There are several potential reasons as to why private equity firms and larger software firms, particularly those in the U.S., have recently swooped on the opportunity to buy these small-cap software firms.
Firstly, the weakness of the Australian dollar means that these U.S. companies are purchasing at a discount. The AUD has particularly weakened last month, dropping to a 29-month low of 62 U.S. cents on October 14. The AUD also hit a yearly low to the Canadian dollar on October 15.
In addition, year-to-date, the tech sector has been one of the worst performers on the ASX, as investors have been looking at more so-called inflation hedged sectors, such as health and energy.
There seems to be a lack of knowledge surrounding the technology sector in Australia. The U.S. tech sector is much larger and more advanced than the Australian sector, meaning they have a better understanding of the performance metrics and valuations of these Australian software stocks.
In regard to the recent acquisitions involving these private equity firms, they have been aiming to take these firms private and then re-sell them in a better market or to a second buyer. They also see a miserable environment that presents an opportunity to buy some great tech companies a significantly reduced valuation.
It will be interesting to see what further activity is initiated within the ASX small-cap tech space in the next few weeks.
