Kofax CEO Reynolds Bish knows a thing or two about Mergers & Acquisitions!

M&A Advice from a CEO Who Has Been There

Kofax CEO Reynolds Bish knows a thing or three about mergers and acquisitions. Since joining Kofax five years ago, the company has executed close to a half dozen “tuck-ins” which he how he describes the Kofax’s strategy of acquiring smaller ISVs with complementary technologies. Under his watch Kofax also sold its $125 million hardware distribution business.

Before joining Kofax, Bish orchestrated several acquisitions while the CEO of Captiva (and its former iterations), before turning around and selling Captiva to EMC in 2005.

In his last two stints as a CEO, Bish has been involved in approximately a dozen M&A transactions. Who better to ask for some strategic advice on the topic.

Xamcor: Do you have any advice for businesses looking at acquiring other organizations?

Bish: People tend to underestimate the level of due diligence that should be applied and, as a result, end up buying things they didn’t intend to get. Most people tend to think about due diligence as doing what we call “auditory auditing.” To be successful, you really need to take the next step.

“That involves digging into the underlying records of a targeted company from a financial perspective. This enables the potential buyer to build charts with historical details and come up with a prospective financial model for the future. From a product point of view, [when considering a software vendor] the prospective buyer needs to go to the source code and make sure it’s organized and documented in a way that it can be delivered by their staff and maintained going forward by your staff, if their developers leave the company. If there is open source code being utilized, the buyer needs to make sure the targeted company has followed all the required conditions, and that they have the right to publish all the code they are using.

People tend to underestimate the level of effort required for proper due diligence. We won’t move forward with an acquisition until we have not only gone thorough due diligence, but also built financial models to justify the price we will pay. On top of that, we develop a 50-100 page integration plan that is broken down function-by-function for two years following the closing. This includes projected monetary progress and quarterly goals.

“We will not take an acquisition to our board before that integration plan is complete. Most people tend to focus too much on the acquisition and way too little on the integration.”

Xamcor: How many companies do you typically look at for each one you buy?

Bish: I would say we meet, either on the phone or in person, with seven to eight companies for each one that we buy. It’s probably closer to two to three to one when it comes to the point of making an offer and subjecting an acquisition target to our full due diligence. Sometimes, their reaction to our due diligence will determine if we move forward or not.

Xamcor: What can we expect next from Kofax on the M&A front? [At the end of its fiscal Q214 (calendar 2013), Kofax had approximately $80M of cash in the bank and a $40M line of credit with Bank of America Merrill Lynch.]

Bish: We are looking at acquiring ISVs in adjacent spaces that will help us better service our customers. Ideally, we look at small to mid-size ISVs, with from several million up to $15-20 million in annual revenue. This is called a tuck-in strategy.

Should we come across a larger opportunity, if it’s compelling enough and we need to raise more money, we would go ahead and do that. I’m firmly convinced that because of the way we run our company, we could go out and raise $100-150 million of debt and then pay that down with our profits.

We have plans to complete at least one acquisition by the end of the calendar year, if not our fiscal year (ends on June 30).

Xamcor: Would you consider acquiring any another capture vendor?

Bish: We will not acquire market share, and we have no interest in rolling up the industry. You’ll have to tell our competitors they will have to find someone else to acquire them.

Xamcor: Throughout your career, you have been on both sides of the acquisition table. Do you have any advice for executives selling their businesses?

Bish: Well, you don’t have to worry about integration. Regardless of whether the buyer asks for your input, they’ll do what they want. Also, if you are thinking about selling, you better prepare yourself for the due diligence you’ll have to go through. As much as I talk about the importance of due diligence, what we do is minuscule compared to what you’ll be put through by an organization like an EMC or a private equity firm. They will bury you with the amount of information they ask for.

Don’t underestimate the effort involved with meeting due diligence requirements. If you are not willing to commit to meeting those requirements, don’t even get started down the road to selling your company.

Xamcor: What type of valuation do you think Kofax can reach? [In December Kofax gained a listing for its shares on the Nasdaq. Prior to that, its shares had been traded almost exclusively on the London Stock Exchange. In the months following its Nasdaq IPO Kofax saw its stock value increase significantly. On April 18, its market cap was at more than $700M.]

Bish: [Speaking to us at Kofax’s Transform event in March.] Two US-based analysts are covering Kofax (and two others will likely initiate coverage). Both have a target price of $10 per share, which would push our market cap over $900M. When I took over the company [in late 2007], I always thought there was a real opportunity to triple the market cap—in essence to take it to $1B or slightly over that. Now I think the opportunity is significantly greater. I think there is a very real opportunity to double the current market cap in the next three years.

Xamcor analysis and conclusion:

Reaching Bish’s projected valuation for Kofax will not be without its challenges. The most immediate hurdle to clear will come with the announcement of its fiscal Q314 results at the end of April. Bish has issued guidance of low double-digit revenue growth for FY14— a target Kofax was well on track towards hitting through the first half of its FY14.

Through the first half of its FY14, Kofax had recorded several consecutive quarters of growth and profitability, which Bish credited to a sales reorganization orchestrated under EVP of Field Operations Howard Dratler who joined Kofax in mid-2012. Dratler held a similar position under Bish at Captiva. At Transform, Dratler explained that Kofax was continuing to ramp up its sales force, an investment Bish said was reducing EBITDA margins, which are currently in the 14.5%-15.5% range, but that he expects to increase those margins to 20% by fiscal 2017.

Kofax is also facing the challenge of integrating several acquired product lines—which it seems to have done successfully in its Kofax TotalAgility 7 platform, which was launched last fall. That said, Kofax still generates the great majority (upwards of 85%) of its revenue from document capture software. So it faces the challenges of maintaining its market leadership in its primary market, while expanding into what it has identified as the faster growing smart process application space.

Through the first half of its FY14 Kofax was doing a good job managing these two missions. Its total software license sales grew 24% during the six months ended Dec. 31, 2013. Indications are that both capture and acquired software products were growing independently and that the release of TA 7 should drive future integrated sales that will complement these legacy sales.

Of course, sustaining this growth is not guaranteed, and Kofax’s sales, marketing, and technical teams will have to continue to execute to drive success. Never one to sit on his laurels, Bish will most certainly continue to look for new avenues of growth as well, which will inherently include some risk.

And then there is the matter of the end game. As Kofax continues to grow, in revenue and market valuation, the list of potential acquisition suitors would seem to grow smaller— how many ECM players can afford to ingest a $1B-plus asset? Of course, as Kofax continues to expand, one of its goals is likely to make itself attractive to a wider variety of enterprise software suitors.

We will be eagerly awaiting Kofax’s next major M&A move—no matter which side of the table if falls on.