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SOFGEN acquisition—attractive valuation but not the best strategic fit. Tech
Mahindra (TM) announced the acquisition of SOFGEN, a Switzerland-based
implementation provider of core banking and wealth-management solutions. TM’s
rationale for the acquisition is to gain access to wealth management and banking
clients. Adoption of core banking by large clients, especially in the US is poor, resulting
in a weak strategic fit. Acquisition consideration at 0.65X EV/revenues and ~8X
EV/EBITDA is attractive. We maintain an ADD rating; target price unchanged at `3,000.
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SOFGEN—focused on core banking implementation
SOFGEN specializes in implementing core banking products and wealth management platforms.
The company also has a tax compliance reporting platform, used by wealth managers in
Europe, to provide tax compliance reporting to individual account holders, primarily as a service.
SOFGEN has revenues of US$45 mn and high single-digit EBITDA margins. Margin improvement
will hinge on growth. SOFGEN has grown by 5-10% in the past two years. SOFGEN derives
60% of revenues from Temenos implementation, 30% from Avaloq and 10% from the tax
compliance platform. Core banking implementation projects are typically for mid-market clients
and are typically short cycle; this explains low client concentration with the top five and 10
clients contributing 30% and 50% to revenues. TM acquired Sofgen at an EV of under US$30
mn, a third of which will be paid over the next two years, depending on revenue and margin
targets. The price paid for the acquisition is attractive at 0.65X EV/revenues and ~8X EV/EBITDA.
An attempt to expand in the banking space; not the best strategic fit
TM is keen to expand in the banking markets. The acquisition provides them access to banking
clients and tier-1 wealth management clients. We detail out thoughts on this acquisition
TM is an implementation partner for Temenos core banking products; SOFGEN derives 60%
revenues from Temenos core banking solutions. TM believes the SOFGEN acquisition brings
in tools, utilities and a larger referenceable client base.
Unlike ERP, core banking implementation is largely restricted to mid-tier banks. We have not
seen instances of large core banking replacement in the US; huge capex outlay and transition
risks are inhibiting factors. TM will gain access to mid-market clients in the banking space
through this acquisition. The management indicated that most of its revenues were from the
Middle East, Africa and Europe.
The core banking market has slowed over the past 3-4 years. This shows up in muted growth
of Oracle Financial Services, Finacle and other product companies. Temenos is one of the few
players to have demonstrated respectable growth. We refrain from forecasting aggressive
growth numbers from the acquired entity.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily12012015az.pdf
SOFGEN acquisition—attractive valuation but not the best strategic fit. Tech
Mahindra (TM) announced the acquisition of SOFGEN, a Switzerland-based
implementation provider of core banking and wealth-management solutions. TM’s
rationale for the acquisition is to gain access to wealth management and banking
clients. Adoption of core banking by large clients, especially in the US is poor, resulting
in a weak strategic fit. Acquisition consideration at 0.65X EV/revenues and ~8X
EV/EBITDA is attractive. We maintain an ADD rating; target price unchanged at `3,000.
��
SOFGEN—focused on core banking implementation
SOFGEN specializes in implementing core banking products and wealth management platforms.
The company also has a tax compliance reporting platform, used by wealth managers in
Europe, to provide tax compliance reporting to individual account holders, primarily as a service.
SOFGEN has revenues of US$45 mn and high single-digit EBITDA margins. Margin improvement
will hinge on growth. SOFGEN has grown by 5-10% in the past two years. SOFGEN derives
60% of revenues from Temenos implementation, 30% from Avaloq and 10% from the tax
compliance platform. Core banking implementation projects are typically for mid-market clients
and are typically short cycle; this explains low client concentration with the top five and 10
clients contributing 30% and 50% to revenues. TM acquired Sofgen at an EV of under US$30
mn, a third of which will be paid over the next two years, depending on revenue and margin
targets. The price paid for the acquisition is attractive at 0.65X EV/revenues and ~8X EV/EBITDA.
An attempt to expand in the banking space; not the best strategic fit
TM is keen to expand in the banking markets. The acquisition provides them access to banking
clients and tier-1 wealth management clients. We detail out thoughts on this acquisition
TM is an implementation partner for Temenos core banking products; SOFGEN derives 60%
revenues from Temenos core banking solutions. TM believes the SOFGEN acquisition brings
in tools, utilities and a larger referenceable client base.
Unlike ERP, core banking implementation is largely restricted to mid-tier banks. We have not
seen instances of large core banking replacement in the US; huge capex outlay and transition
risks are inhibiting factors. TM will gain access to mid-market clients in the banking space
through this acquisition. The management indicated that most of its revenues were from the
Middle East, Africa and Europe.
The core banking market has slowed over the past 3-4 years. This shows up in muted growth
of Oracle Financial Services, Finacle and other product companies. Temenos is one of the few
players to have demonstrated respectable growth. We refrain from forecasting aggressive
growth numbers from the acquired entity.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily12012015az.pdf
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