Tuesday, May 06, 2014

Initial Thoughts on Lexmark's Offer for ReadSoft

The buzz this morning is all about Lexmark's a bid to acquire ReadSoft.

Here are some initial thoughts:
  •  It appears like a done deal, as the acquisition has been unanimously recommended by ReadSoft's board of directors and, according to ReadSoft, "shareholders representing 22.9% of the shares and 41.5% of the votes have undertaken to accept the offer."
  • It's a fairly attractive offer for ReadSoft shareholders considering it represents a 117% premium over the shareholder value when the market closed on yesterday. (The offer is $6.11 in cash for each Series A and Series B share of ReadSoft for a price of approximately $182 million, net of cash acquired.) ReadSoft shares closed May 5 on the Stockholm exchange (where the Swedish-based company primarily trades) at less than $3 per share, a value they had basically held for the past three months - which was about half of the company's 52-week high, reached last summer,
  •  It's not that attractive of an offer if you consider that two years ago Lexmark paid $148M to acquire Brainware, a capture ISV about a quarter the size of ReadSoft. ReadSoft reported $117M in revenue in 2013 - although it has struggled recently with growth and profitability - which likely drove the share value down over the past year.

How do you integrate Brainware with ReadSoft under Lexmark's Perceptive Software practice? This is the $100M plus question and here are some thoughts:
  • ReadSoft is clearly larger and more established, but Perceptive has certainly invested a lot into Brainware.
  • Both ReadSoft's and Brainware's strongest market has been A/P, but I'm not exactly sure that they are direct competitors. ReadSoft really only took off in the A/P space after it acquired the Ebydos SAP workflow technology, and has since added similar workflow for Oracle Financials. Brainware always touted its ability to do "straight-through" processing based on three-way matches, which theoretically eliminates the need for workflows. So, Brainware's technology always seemed like a better fit in PO heavy environments where there were not a lot of exceptions, while ReadSoft was great when there were more workflow requirements. Of course, when Perceptive acquired Brainware, it touted the ability to introduce Perceptive's ImageNow worklfow into the equation and even things out a bit. I'm not sure how much that has been a factor. The bottom line, however, is that both companies compete primarily in the same horizontal market.
  • Geographically, it seems that Lexmark is counting on ReadSoft to increase it presence in Europe, where ReadSoft generated approximately 70% of its revenue in 2013. Even though Brainware's development team is in Europe, its sales and marketing were always based in the U.S. This reminds me somewhat of Perceptive's acquisition of German ECM ISV Saperion last year, which has technology similar to Perceptive's legacy ECM platform, but was acquired to give Perceptive a stronger European ECM base.
  • Along those lines, in our latest issue we ran a brief discussing how Perceptive was going to leverage its new Evolution Hybrid Cloud environment to potentially bring its two ECM platforms together. Perhaps it will eventually do the same with its two capture software platforms.
  • Perceptive also gains the XBOUND document capture workflow platform, which ReadSoft acquired with foxray a couple years ago. A recent conversation with ReadSoft CMO Andrew Pery indicated that the foxray sales pipeline is improving and evolving as ReadSoft has continued to productize what had historically been software geared mainly toward customized one-off type implementations. ReadSoft had been targeting the service provider and mailroom markets with XBOUND - not necessarily a strong market for Perceptive historically.
Finally, I'm looking forward to catching up with top ReadSoft (and maybe Lexmark?) executives at ReadSoft's user conference next week.

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