Thursday, December 5, 2013

The Flip: A Quick Purchase and Sale by a PE Firm

The Flip: A Quick Purchase and Sale by a PE Firm

A few days ago, the private equity firm Thoma Bravo sold Digital Insight, which it had owned for a mere two months.[1]  The firm made over $600 million on its $1 billion investment.  The business was purchased from Intuit (OTC: INTU) this summer and was just sold to NCR (NYSE: NCR).  Thoma Bravo earned an annual return of 299% on its brief investment, which I am sure will be welcome news to its investors.

Thoma Bravo has been in business for over thirty years and specializes in application and infrastructure software and financial and business services.  Since their track record isn’t public, I can’t evaluate their investment prowess.  However, they have raised a series of funds and made 26 acquisitions over the years, so it’s apparent that they are a seasoned and competent player in private equity.  Thoma Bravo’s purchase and quick disposal of Digital Insight shouldn’t provide investors with any greater confidence in their ability.
Back Office II (1999)
The PE firm was simply lucky that NCR surfaced as a buyer within months of acquiring Digital Insight.  Any investor would be glad to accept $600 million on a one billion investment over a 124-day period.  Thoma Bravo didn’t have to spend any time or money implementing its plan to expand Digital Insight’s business.  Of course, the cash-on-cash (CoC) multiple would probably have been much greater if Thoma Bravo had built the business over time.  Cash-on-cash multiple is the amount of value received for selling a business divided by how much the investor paid.  In this case, the CoC multiple was 1.6 ($1.6 billion divided by $1 billion).  I’m sure that Thoma Bravo originally expected to earn a 25% to 30% return and a CoC multiple of 3 to 4 times their original investment.

Clearly, no PE firm can build a successful business merely flipping companies.  This kind of windfall is rare.  So there’s little for Thoma Bravo or its investors to learn from this experience.  They simply got an early Christmas present.

Intuit and its investment banker should be subjected to intense review by its investors and independent board members.  Intuit is a public company with extensive experience buying and selling businesses. Presumably Intuit and its banker conducted a sales process to surface buyers for Digital Insight.   As an investor I’d want to know why Intuit didn’t include NCR in its sales process.

I suppose that NCR could have participated in Intuit’s sales process and failed to make a competitive bid.  Or, Intuit might have had a competitive reason for excluding NCR from its sales process.  Maybe Thoma Bravo had lined up NCR before it made its bid and acted as an agent for NCR.   This latter possibility does happen from time to time.  Just before the credit bubble burst, Blackstone acquired a huge real estate portfolio and quickly flipped a substantial part of it at a quick profit.  In Blackstone’s case they were acting as a wholesaler.  They bought a huge portfolio and quickly broke it into pieces that were more easily digested by smaller investors.  In the case of Digital Insight, I don’t think any of these scenarios apply.

Daniel Primark of Fortune[2] suggests that Intuit set a 30-day timetable for closing on the deal, which effectively precluded strategic buyers like NCR.  If this is true, they paid a huge price for speed.  They left $600 million of value on the table.  That amount of money isn’t loose change at Intuit, and its investors should be asking questions.


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