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Market: AIM
Sector: Software
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Advanced Computer Software Group plc

Advanced Computer Software Plc comprises three main divisions: Business Solutions, Health & Care and Managed Services. Together, these divisions provide a range of software and IT services that enable public, private and third sector organisations to retain control, improve visibility and gain efficiencies through streamlined processes.

Advanced Computer Software acquisition ticks all the boxes

11th Mar 2013, 11:53 am by John Harrington
Advanced Computer Software has set itself ambitious growth targets and this acquisition looks likely to play a major part in achieving them. Advanced Computer Software has set itself ambitious growth targets and this acquisition looks likely to play a major part in achieving them.

Fast growing Advanced Computer Software’s (LON:ASW) biggest deal to date, announced on Friday morning, bears all the hallmarks of its highly successful acquisition strategy.

It has acquired Computer Software Holdings (CSH) for £110mln in cash, and the business has most of the things Advanced Computer Software (ACS) looks for in an acquisition: similar but complementary activities; strong cash generation; a high level of recurring revenue from customers who love the product; its own intellectual property; and the opportunity for cross-selling.

The bonus this time round, as chief executive officer (CEO) Vin Murria explained to Proactive Investors, is that this is a company the senior management knows extremely well, as many of them were on board when CSH was taken private back in 2007.

Advanced Computer Software chairman Michael Jackson, CEO Vin Murria and chief finance officer Barbara Firth were directors of Computer Software Group (CSG), which owned the majority of the present CSH businesses prior to the sale of CSG to Hg Capital in 2007.

Murria said she had been keeping an eye on Computer Software Holdings during its time under private equity group Hg Capital, and felt the time was ripe to make a move for the company.

“We like to buy a business before it has been primed for sale,” Murria confided.

“Hg Capital spent much of the time paying down debt. They did not damage the business, by any means, but neither did they grow it as fast as we think it could grow,” Murria said.

The acquired company will be assimilated into two of ACS’s three divisions: Business Solutions and 365 Managed Services.
Lest there be any doubt where this leaves ACS’s third division, the Advanced Health & Care unit, Murria said the acquisition “absolutely does not mean we are giving up on healthcare.”

The size of the acquisition, equal to just over a quarter of ACS’s market capitalisation, means there will probably be a moratorium on big acquisitions for a while, as the group focuses on integration and delivering growth.

To that end, chief financial officer (CFO) Barbara Firth has a new role as chief operating officer (COO) responsible for acquisitions and integration, where her experience in a senior finance role at newly-acquired CSH will stand her in good stead. Paul Gibson remains as COO responsible for ACS’s group operations.

Taking on the CFO role is Guy Millward, previously a non-executive director of ACS. Millward has worked as finance director of techie stalwarts Alterian, Morse and Kewill, and Murria sounded pleased as Punch to have him on board.

The veteran number cruncher will be pleased to note that the acquisition will be “immediately earnings enhancing”, yielding initial cost savings of £1.4mln, with a further £1.0mln of cost synergies expected to feed through within two years.

This is not a deal about cost savings, however; it is “a sweet deal” that is about growth, Murria maintains.

For a start, it substantially beefs up the company’s offering to professional services – lawyers and accountants, which coincidentally (or perhaps not) is an area well known to ACS non-executive director Mike McGoun; McGoun was formerly chairman of Tikit, which was recently sold to BT Group.

Secondly, the acquisition gets ACS’s foot in the door in the not for profit (NFP) sector. CSH’s Iris NFP product offerings include membership and fund-raising software, and the plan here is to broaden CSH’s NFP solutions to make them more generic, so they can be sold to other sectors.

Taking an acquired company’s proprietary software and incorporating it into the parent company’s product offerings is a typical ACS ploy.

“What we look for is, if there’s something we can use – and it might not be 100%, it might only be 90% we can use – then that’s two years’ development you’ve saved yourself, and we’ll do the 10%,” Murria explained.

“The most important thing, though, is not that development – that’s not where the real savings come; it’s the ability to then get out there and sell it,” Murria believes. That cross-selling becomes a lot easier if you’ve already done it in another market.

While Murria is excited about the acquisition, the existing business is doing very nicely as well, she stressed.

Along with the news of the acquisition and the board changes, the group released a trading update for the year to February 28, 2013.

Full year revenues are expected to be at least £119mln, which is ahead of the market consensus forecast of £115.5mln, according to Factset, and is a sharp improvement on £98.2mln of revenues the year before.

Adjusted underlying earnings (EBITDA) should be no less than £26.6mln, up more than 10% on the previous year’s £24.1mln.

Cash conversion remained above 100%, which means the company is well placed to pay a dividend should it choose to do so. A pay-out is under consideration, but the company is making no promises at the moment.

ACS has signed a new £105mln banking facility with HSBC, RBS and Silicon Valley Bank. Murria indicated to Proactive that, following the acquisition, debt is around £65mln.

That leaves plenty of headroom for more acquisitions, but they appear to be off the menu for now, with Murria pledging the company would now be focusing on three things: delivery, delivery, delivery.

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