Stock Market Review - Crimsonwing's acquisition strategy on track
Dutch IT services company acquired for €1.9 million
Crimsonwing plc hosted stockbrokers at their corporate offices in Marsa earlier this week following the company's recent important strategic development - the acquisition of a third IT software and services business (VDA) thereby pursuing further one of its stated IPO objectives of "identifying and acquiring companies operating largely within the Microsoft technology market that can quickly provide added value to the group through the exploitation of the Malta solutions centre".
In a detailed and very professional presentation chief executive officer David Walsh and solutions director Derek Linney shared the podium to provide the stockbroking community with an update on the company's existing operations - the first such update since listing last December - and more importantly, to provide brokers with some background financial and strategic details behind the acquisition of VDA.
On the operational front, Crimsonwing reported a continued build-up of its client base in all three main markets: the UK, The Netherlands and the US. More importantly, the company has also managed to provide added solutions to its existing customers thereby enhancing its product offering and generating additional value added from its existing client base.
During this period, the company also added a very important solution to its product portfolio, being the first partner to be accredited on the Microsoft Dynamics Mobile solution, a new development tool enabling Microsoft partners such as Crimsonwing to develop and customise applications for Microsoft Dynamics users.
The Netherlands-based VDA boasts over 60 clients, acquired and largely retained over its 16-year history. The clients hail predominantly from the media and publishing sector. Approximately 30 per cent of the company's annual revenues are recurring through maintenance and support contracts in place with some of its established clients. Among these clients, VDA handles the fourth largest cable TV company in The Netherlands CAIW, GroupM - the parent company to WPP media agencies and 20 other companies operating within the radio and TV sector.
• VDA is expected to bring some significant and immediate benefits to the Crimsonwing Group namely:
• Establishing critical mass in the Dutch market;
• Increasing Dutch speaking professionals able to support the growing Dutch market;
• Strengthening further the group's presence in the broadcasting and media sector;
• Generating increasing EUR-denominated revenues from a wider client base thereby counteracting the presently larger GBP-denominated revenues; and
• Contributing profitably to bottom line in the short term.
Following this acquisition, a leaner and meaner The Netherlands-based structure will take shape comprising the existing companies Crimsonwing BV and 51 per cent owned Crimsonwing Promentum Holdings vacating their current premises and operating from VDA's present setup. This one-stop shop is expected to generate a combined turnover of €6.5 million and generate synergistic benefits as a result of reduced occupancy and senior management costs, shared R&D expenditure and a reduction in contracting costs following transfer of common duties to the Malta-based solutions centre. The immediate cost savings are expected to reach €180,000 to €200,000 per annum and these savings should immediately filter through the bottom line. In fact, the company expects 2008 profits before tax at VDA to reach €250,000 from turnover of close to €3 million.
The cost of acquiring 100 per cent of VDA's equity amounts to €1.9 million and Crimsonwing is expected to finance this predominantly through a five-year debt financing arrangement in place with a local bank. This valuation works out at 0.56 times VDA's 2007 turnover, a figure which, according to the company, is far lower than the industry average price to sales ratio of 1.38 times (Regent Associates - valuation across 3,215 acquisitions of European technology companies during 2007). To put these numbers into perspective, it may be worth considering that Crimsonwing plc floated on the Malta Stock Exchange last December on a price to forecast March sales ratio of 1.35 times.
On the Malta Stock Exchange, Crimsonwing's share price reacted positively to the VDA acquisition as it advanced by 6per cent to €0.53. The equity had briefly traded at a high of €0.62 on its debut last January but after stabilising at around the €0.55 level, the share price dropped back to the IPO level of €0.50 on May 30. The recent decline in the share price and lack of buying support is somewhat disappointing given the heavy oversubscription witnessed at the time of the IPO. This general lack of follow-through following an IPO is often evident on the local market. Investors are sometimes very enthusiastic about shares and bonds during an initial offering and despite the fact that, on many an occasion, applicants receive less than their full entitlement and remain very disappointed in the process, many of these investors do not continue to acquire shares/bonds in the open market.
Crimsonwing is expected to convene another stockbrokers meeting in mid-July during which the first set of financial results as a listed entity will be published and the outlook for 2008/2009 revealed. Furthermore, guidance on VDA's financial fit into Crimsonwing's accounts will expose the potential "significant contribution to Crimsonwing's profitability".
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, RFC, are members of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof, and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
In a detailed and very professional presentation chief executive officer David Walsh and solutions director Derek Linney shared the podium to provide the stockbroking community with an update on the company's existing operations - the first such update since listing last December - and more importantly, to provide brokers with some background financial and strategic details behind the acquisition of VDA.
On the operational front, Crimsonwing reported a continued build-up of its client base in all three main markets: the UK, The Netherlands and the US. More importantly, the company has also managed to provide added solutions to its existing customers thereby enhancing its product offering and generating additional value added from its existing client base.
During this period, the company also added a very important solution to its product portfolio, being the first partner to be accredited on the Microsoft Dynamics Mobile solution, a new development tool enabling Microsoft partners such as Crimsonwing to develop and customise applications for Microsoft Dynamics users.
The Netherlands-based VDA boasts over 60 clients, acquired and largely retained over its 16-year history. The clients hail predominantly from the media and publishing sector. Approximately 30 per cent of the company's annual revenues are recurring through maintenance and support contracts in place with some of its established clients. Among these clients, VDA handles the fourth largest cable TV company in The Netherlands CAIW, GroupM - the parent company to WPP media agencies and 20 other companies operating within the radio and TV sector.
• VDA is expected to bring some significant and immediate benefits to the Crimsonwing Group namely:
• Establishing critical mass in the Dutch market;
• Increasing Dutch speaking professionals able to support the growing Dutch market;
• Strengthening further the group's presence in the broadcasting and media sector;
• Generating increasing EUR-denominated revenues from a wider client base thereby counteracting the presently larger GBP-denominated revenues; and
• Contributing profitably to bottom line in the short term.
Following this acquisition, a leaner and meaner The Netherlands-based structure will take shape comprising the existing companies Crimsonwing BV and 51 per cent owned Crimsonwing Promentum Holdings vacating their current premises and operating from VDA's present setup. This one-stop shop is expected to generate a combined turnover of €6.5 million and generate synergistic benefits as a result of reduced occupancy and senior management costs, shared R&D expenditure and a reduction in contracting costs following transfer of common duties to the Malta-based solutions centre. The immediate cost savings are expected to reach €180,000 to €200,000 per annum and these savings should immediately filter through the bottom line. In fact, the company expects 2008 profits before tax at VDA to reach €250,000 from turnover of close to €3 million.
The cost of acquiring 100 per cent of VDA's equity amounts to €1.9 million and Crimsonwing is expected to finance this predominantly through a five-year debt financing arrangement in place with a local bank. This valuation works out at 0.56 times VDA's 2007 turnover, a figure which, according to the company, is far lower than the industry average price to sales ratio of 1.38 times (Regent Associates - valuation across 3,215 acquisitions of European technology companies during 2007). To put these numbers into perspective, it may be worth considering that Crimsonwing plc floated on the Malta Stock Exchange last December on a price to forecast March sales ratio of 1.35 times.
On the Malta Stock Exchange, Crimsonwing's share price reacted positively to the VDA acquisition as it advanced by 6per cent to €0.53. The equity had briefly traded at a high of €0.62 on its debut last January but after stabilising at around the €0.55 level, the share price dropped back to the IPO level of €0.50 on May 30. The recent decline in the share price and lack of buying support is somewhat disappointing given the heavy oversubscription witnessed at the time of the IPO. This general lack of follow-through following an IPO is often evident on the local market. Investors are sometimes very enthusiastic about shares and bonds during an initial offering and despite the fact that, on many an occasion, applicants receive less than their full entitlement and remain very disappointed in the process, many of these investors do not continue to acquire shares/bonds in the open market.
Crimsonwing is expected to convene another stockbrokers meeting in mid-July during which the first set of financial results as a listed entity will be published and the outlook for 2008/2009 revealed. Furthermore, guidance on VDA's financial fit into Crimsonwing's accounts will expose the potential "significant contribution to Crimsonwing's profitability".
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, RFC, are members of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof, and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.