An efficacious build-up strategy Linedata services

Success Story

A successful build-up strategy must be led a strong managerial team and must be based on a well-defined and far-seeing business strategy. The financial element in any such project is simply a tool to lever the creation of value .

In the case of Linedata Services – formerly GSI Division des Banques, an IT company specialising in providing solutions for managing collective investment portfolios and corporate savings schemes – the first company it acquired had an excellent management team whose strategic vision involved the development of its activities in a particularly cost-effective field - Active Server Pages (ASP).

In effect, the acquisition strategy was resolutely focused on integrating companies with activities that the group already covered and on developing the group into a market leader position first in France and then in Europe. The project therefore depended on an intelligent and reactive interpretation of the core business concept. In one acquisition, GSI Division des Banques found a little-developed credit software activity that was considered as having good potential for client and business model synergies. At a later stage, having conducted a market survey of the main players in its sector to identify potential targets, Linedata Services acquired EKIP in June 2000, a move which projected the group into the leader position on the European market. AXA Private Equity played a key role in identifying target acquisitions for Linedata Services via its business introducer network.

The financial sponsor also has an important role in the acquisition process itself alongside the respective management teams.

In all our build-up projects we set up a mixed team with at least one member of AXA Private Equity, in charge of the legal and financial side, and two or three managers from the companies. The final negotiations must be conducted by the company chairman and a member of AXA Private Equity in order to spread the responsibilities equally between management and financial sponsor.

In the case of Linedata Services, this combined responsibility approach was perfected over the months and enabled the company to make seven acquisitions between 1998 and 2002, three of these outside France.

Another key element in successful build-up strategies is integration.Companies pursuing a build-up strategy need efficient and rapidly implemented reporting tools. However, these tools cannot replace the regular presence of the acquiring company’s senior management in the newly acquired subsidiaries to prevent rumours and dispel unfounded fears.

In the case of Linedata Services, one of its acquisitions was negotiated at the end of July but finalised at the beginning of September in order to avoid an announcement to staff during the August summer holidays. Another key factor in the integration process is staff mobility between the merging companies.

Once integration has been achieved, care must be taken to prevent changes in the consolidation scope from distorting the profitability indicators by making sure that earnings are reported on an ROIC basis and in pro forma.

Build-up strategies also need a specific financial approach. For example, the initial leverage may be relatively low at the beginning in order to avoid overly restrictive covenants placing the company in a delicate situation should the acquisition not work out as planned. As the project progresses, the leverage effect can be stepped up in line with the cash flow generated by the group.

The implementation and use of monitoring and reporting tools must not hinder the company’s development. In the case of Linedata Services, AXA Private Equity structured the acquisition financing so that managers could retain control of their groups while maintaining their growth potential via, for example, the use of investment certificates and voting rights. Given Linedata’s management ambition to remain independent and AXA Private Equity’s 3 - 4 year investment horizon, the most obvious exit solution for all parties was a public listing of the company on the Paris stock market.

The pre-selection of financial intermediaries was performed for Linedata Services by AXA Private Equity, with the final choice naturally being taken in conjunction with the company.

As regards the IPO itself, the roles were split. AXA Private Equity focused on negotiating the value, terms and conditions and the size of the deal with the banks, while collaborating with the management on the IPO prospectus and a complementary communications programme. At the same time AXA Private Equity drew up a shareholder agreement with the management ensuring them continued control of the Linedata Services group in order to strengthen their shareholder position and release them from concerns not directly linked to the growth of the company and the creation of value .

Another essential component of build-up strategies is internal and external communication. If this is inadequate, the groups created by the build-up can suffer from a lack of market visibility and a lack of financial transparency.

The stategy described here therefore worked as an excellent growth accelerator. At the beginning of 1998, for example, when AXA Private Equity was assisting the management of GSI Division des Banques with its MBO, the company’s sales were around EUR 12 million, with an 80-strong staff; in 2003, its sales had risen eight-fold to EUR 100 million; its operating margin was over 16% and the workforce numbered 700 spread throughout Europe and the USA. The company has been listed on the Nouveau Marché of the Paris Stock Exchange since May 2000, and its shares have been trading in the recent past at EUR 16, close to its initial price of EUR 17. AXA Private Equity’s shareholding is now down to 7%, and the group’s managers and staff are still in control of their company.