Case Study: Buying a Cloud Consulting Company

Featuring:  Altigen Communications (Managed Cloud Communications)

At the Austin Dale Group, we work with technology industry leaders to grow and realize optimal value for their businesses.  Tech M&A is a key part of our practice, both on the buy-side and the sell-side.

Entrepreneurs often ask us how the buy-side process works and if a strategic acquisition is the right thing for their business.

We documented this recent example of a company acquisition on behalf of a strategic buyer.

Company Background

From its first product launch in 1998, Altigen Communications has been a leader in developing and deploying software-based telecommunications solutions.  As the industry shifted from on premises to cloud-based solutions, Altigen capitalized on that opportunity by transitioning its business to focus on Unified Communications built on the Microsoft technology stack.  Today, Altigen offers Unified Communications as a Service (UCaaS), Cloud Contact Center (CCaaS) and Digital Customer Engagement solutions which natively integrate with Teams Phone System and Microsoft 365 to deliver its world class Customer Experience solutions.

As a public stock company, Altigen (OTCQB: ATGN) has a goal to substantially grow revenue and profitability for its shareholders. To achieve their growth goals and overall mission, Altigen needed to expand its customer solution delivery and product deployment capabilities.  After evaluating multiple options, they determined that an acquisition would be the most effective way to do that and approached the Austin Dale Group to aid them.

Company Growth Objectives

Altigen’s objective was to acquire a Microsoft-centric services company, with broad and deep expertise across the Microsoft stack.  Any acquisition would have to strengthen Altigen’s ability to deliver and deploy solutions to customers, and, ideally, provide cross-selling opportunities to existing clients.  Equally important was the fact that any acquisition must be accretive to shareholders in terms of both revenue and net income.

We spent time with Altigen leadership defining their objectives and outlining the criteria for prospective acquisitions.  The target definition process can be an iterative affair and sometimes it can take several batches of prospects before the right fit becomes clear to the acquirer.

With any transaction there will be tradeoffs.  You have to prioritize the items on the wish list and be clear on the attributes which will drive the goals of the overall business.

Throughout the process, Altigen was clear on their overall objectives, much more so than many other buy-side clients we have worked with in the past.  However, on every deal we must carefully balance the tradeoffs to find the right match.  In this case the key drivers were:

  • Profitability and revenue contribution
  • Revenue mix: product sale/resale versus service provision
  • Customer types
  • Service capabilities and industry vision
  • Employee skill sets
  • Leadership synergy (chemistry and style alignment)

Preparing to Go to Market

In looking for an acquisition, we approach companies which are listed for sale and companies which are not for sale, but which meet our client’s criteria.  As Altigen’s agent, part of our responsibility was to create interest in Altigen and to explain how a combined entity could have advantages for both parties.

Altigen is a public company, so significant amounts of company information are provided through the Investors section of its website and via annual reports and other regulatory filings.  Since Altigen is publicly traded, we had to be careful about what information we released to prospective acquisition targets, even under confidentiality agreements.

Nevertheless, we needed to answer the question of why it would make sense to join forces with Altigen.  This included compilation of public information, plus information on potential joint strategy.

Developing this story is a key collaborative activity that we facilitate as we prepare to go to market.  It consists of a high-level Teaser document and a more in-depth Buyer Profile.

The Teaser is used to build interest but does not include the name of the prospective buyer.  Once we develop enough interest to conduct in-depth discussions, we sign confidentiality agreements and share the Buyer Profile.

Identifying Potential Targets

From our extensive experience in the technology industry, Austin Dale Group compiled a list of dozens of potential targets for Altigen.  Initially we focused on Microsoft-centric IT services companies listed for sale.  These were “low hanging fruit” since they were already for sale.  They allowed us to focus in on Altigen’s key criteria and to determine which tradeoffs Altigen was willing to accept to do a deal.

With the blessing of Altigen, we contacted prospects about the opportunity and provided the Teaser document to spur interest.  As is common in buy-side engagements, we went through quite a few prospects during the process.  In Altigen’s case, although they were impressed by the quality of each organization we presented to them, we eliminated all the companies that were for sale. The next phase of our engagement was to move into consideration companies that were not for sale that met Altigen’s target profile.

Even if a company is not for sale, many business owners will at least listen to acquisition opportunities if they are presented correctly.  Some of the conversations can have other positive outcomes, such as reseller or partner agreements for our client, even if they don’t result in an acquisition.

Through extensive research we ultimately identified ZAACT Consulting as the most attractive target for Altigen.  Based near Salt Lake City, ZAACT was the right size, had an ideal skill set mix, had a strong track record of delivering IT services, and had a strong leadership team which could augment the growth of Altigen’s senior management team.  The two companies shared a common vision on the direction and growth of the telecommunications market and had some shared contacts and experiences which helped to build trust amongst the combined leadership team.

Negotiating a Letter of Intent

At the Austin Dale Group, we strive to find a win-win M&A agreement for our client and the other party, regardless of whether we are on the buy-side or the sell-side.  Our decades of experience in the IT industry lets us speak the same language with technology entrepreneurs and understand their needs and goals.

In negotiating a Letter of Intent, the first step is to listen, both to our client and to the principal stakeholders on the other side of the transaction.  We want to understand their motivations and key criteria to find a meeting point that works for both parties.

Altigen wanted to use a combination of cash and stock, with a bias towards cash.   Altigen also wanted to ensure that key leaders would stay with the combined company to maintain and grow the overall business.  ZAACT’s owner wanted cash, but he also wanted a way to grow the value of his equity in the short term and in the longer term as a personal investment.

As a larger public company and a recurring revenue software company, Altigen can command higher valuation multiples for a given amount of revenue and EBITDA than could ZAACT.  Exchanging a portion of his ZAACT equity for that of Altigen, the owner got higher valuation potential, a faster growth path, and greater liquidity via the public market for Altigen stock.  The immediate cash at close was also attractive.

Managing Due Diligence

The Due Diligence process can be tedious and time consuming for all parties, and it can involve a surprising number of participants.  In this case, the buyer had prior M&A experience and an experienced corporate team to handle the Due Diligence process.

That made the process easy for the Austin Dale Group. Altigen and ZAACT worked together to satisfy themselves on the desirability of the transaction and built chemistry as a combined leadership team.

In this deal, since the two companies had truly synergistic alignment, the biggest thing that came out of the review process was the need to assign certain customer contracts from the seller to the buyer.  These contracts involved government entities and required a lengthy and complex approval process.  While the eventual assignment was never in doubt, it took time and patience to navigate a tedious bureaucratic process, delaying the close for approximately sixty days beyond the initial target.

Negotiating the Definitive Agreement

The definitive sale agreement is generally negotiated in parallel with Due Diligence.  Findings in the due diligence process can have a material impact on the final agreement terms and valuation.

Altigen and ZAACT came to terms fairly quickly, with the due diligence process confirming expectations and the definitive agreement largely following the terms and conditions laid down in the Letter of Intent.

Closing the Transaction

Closing a transaction is all about timing and coordination. Legal, financial, communications, and human resources all must be synchronized to affect the transfer of ownership.  With ZAACT, the biggest issue to overcome was the assignment of customer contracts, as noted above.

Since Altigen is a public company and has quarterly reporting requirements and earnings calls, Altigen wanted to synchronize the close of the transaction with its earnings releases, so that they could share the good news and entertain any questions which arose from shareholders or analysts.

Unfortunately, neither Altigen nor ZAACT could motivate the government entities involved to expedite the contract assignment any faster within the government agencies.  In the end this meant that Altigen did the public announcement of the transaction in two steps, the first announcing that the deal had been signed (prior to their earnings call) and then subsequently that the deal had closed, after the final contract assignment had been granted, some weeks after the earnings call.

Key Take-Aways for the Entrepreneur

  • Buying a company can be a lengthy and complex process with numerous potential pitfalls. Engaging competent, experienced advisors can help to ensure success.
  • It may take considerable time to find suitable target companies that are willing to sell or merge. The buyer’s criteria may evolve during the process.
  • Buying a technology business requires specialized skills. Having M&A Advisors who understand the business and the technology and have industry connections is often crucial for achieving the desired outcome.
  • In the due diligence process, be prepared for an intense period with high demands. Avoid scheduling vacations or other time-consuming parallel activities during this period.
  • When negotiating contracts with customers, vendors or partners, particularly long-term renewable contracts, keep in mind that you might want to eventually sell the company. Make sure that those agreements have change of control provisions and give a potential acquirer enough flexibility to address changing circumstances.  As an acquirer, be aware that contract assignments can be a delaying factor, depending upon the type of customers involved.  Patience is a virtue in tech M&A.