On the sale of MYOB (again)
The private equity deal Archer Capital has just completed – selling MYOB to another private equity firm Bain Capital – is a big deal for the small business economies of Australia and New Zealand, as millions of businesses run on MYOB software.
Many customers and partners have asked us for our take.
It’s a subject we’ve covered before: Changing of the guard.
Late last week it was tipped that Sage in the UK was buying MYOB. That was a surprise to us as Sage appeared to have changed their model from buying the incumbent provider in each market (like Pastel, Peachtree etc). Sage’s problem is that their acquisition model has left them with many country specific code bases. These are a huge problem, because like other big vendors, Sage needs to transition to global SaaS engines to compete with new innovators like Xero.
With MYOB, Sage didn’t get innovation or expertise in global online, so it was a straight, buy the EBIT, financial transaction. But you can understand why it would do it.
According to news reports, Sage put the biggest offer on the table but the reaction to the deal was unfavourable – MYOB would have been 25+% of the Sage value due to recent falls in the Sage share price and the weak pound. As a result the deal would have required lengthy shareholder approval. So Archer Capital took a deal that was 10% less and sold to US based Bain Capital.
Sage shares rose on news they weren’t buying MYOB.
The Archer side of the story paints Archer as the uber private equity firm, creating $700m+ of value by cutting costs and raising prices – all at the expense of customers in the long term.
But it remains a hugely profitable deal for Archer. The acquisitive private equity fund bought MYOB in February 2009 for about $500 million, and then boosted earnings by stripping costs, raising prices and aggressively going after customers.
So why did Bain buy? And how do they grow the value from $1.2B to $2B to earn an acceptable PE rate of return.
We think this is what happened:
- The Archer guys are very smart and ruthless about making a return
- They correctly picked they could be in and out before the sunset business and decline in accountant-side revenue, was noticeable
- They cut costs to the bone, reduced investment and put up fees. No quality or innovative software shipped during their time
- They knew the end customers were loyal to the brand and not sophisticated enough to see the play
- The flawed Microsoft Azure sync strategy looks good on paper but they never had to deliver it – great for a sale
- They found a further PE firm with lots of money, needing to do a deal but not experienced in the Australasian market, who had been tracking the category
- Flick. $700m profit. Masterful
What upsets us is that Archer made $700+m profit without shipping any innovative software and upsetting customers.
Bain Capital simply got left holding the baby. How can they drive value from 1.2B to 2B?
- Raising fees will be hard as the market is much more competitive and Xero is getting to scale
- They will have to take out cost – but from where? Even less R&D (and R&D only counts if you ship something). Maybe sell ISP businesses which compete with their channel?
- They could try to build scale – we’d expect them to look at Banklink now
- Other markets – they know the USA, and may have forgotten that MYOB pulled out of that market and Intuit is a much more capable competitor with 90+% market share and already has online products
The spurned Sage will probably look at the smaller acquisition of Banklink, which gives them a presence in this part of the world and Banklink is doing some things in the UK so might be a good fit.
Putting it in perspective
Many have commented that Xero is being aggressive about this. These transitions are big opportunities so it’s our job to educate potential customers about what’s going on.
Further, we truly believe that you can make money while being a good business that genuinely makes life better for your customers and partners. Craig Winkler the original founder of MYOB believes that as well which is why we wanted him involved in Xero.
These PE transactions are not about doing the best for the customer, they make a few people rich.
Xero is public company so customers, partners and investors can share success while we improve productivity at a national level. If we weren’t doing the very best for our customers we simply wouldn’t want to be in the business.
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22 August 2011 #
23 August 2011 #