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It is a seller’s market these days for small software companies. According to studies from the research organization Mergermarket Group, the year 2016 set a record for the highest number of software M&A transactions since the company began recording such data in 1999.
Alabama certainly has been no stranger to these types of acquisitions. More than half a dozen Alabama-based software companies have been acquired by larger firms since the beginning of 2013. This list includes SourceMed, Daxco, Chesapeake Systems Solutions, Malcovery Security, JVC America, Allstates Technical Services, Success EHS, ClinicAnywhere and XcitekSolutionsPlus.
It does not appear that this trend will be ending any time soon. Nearly 80 percent of the private equity firms surveyed by Mergermarket — and 25 percent of the corporations — indicated that they plan to make three to four software acquisitions over the next two years.
Kevin Chowning has experienced this growing demand firsthand. In the 1990s he was part of an Athens-based software company called The Pinnacle Group. The firm had revenues of approximately $24 million, he says, when it was sold in 1997 to Computer Sciences Corp., a multi-billion-dollar international firm.
At that time, smaller companies like The Pinnacle Group jumped at such opportunities, even though Chowning says CSC was a global behemoth that had little in common with a small startup from Alabama.
“It was a bit of a culture shock for us, ” Chowning says. “We stayed around for a few years and then decided we wanted to get back to that smaller business culture that we had.”
So in 2001, Chowning became one of the founders of Summit Technology, a health care-focused, consulting and managed services firm specializing in PeopleSoft, ERP and Oracle Cloud applications. Once again the company experienced steady growth, and by 2015 there was a desire by Summit executives to partner with a larger firm. But this time, Chowning says, there were enough potential suitors that the company could be choosy.
“There definitely is a market for smaller businesses to sell, ” Chowning says. “When we made the decision to do this, we hired a broker to put us in front of some larger firms and investors. We had a fair amount of interest from some firms that looked at us purely as an investment play. We didn’t want that. We were looking for a firm that had a similar management style as us.”
So instead of jumping at the first or biggest offer, Summit, with $15 million in annual revenues in 2015, was comfortable being acquired by Emtec, a Pennsylvania-based consulting firm with revenues of approximately $100 million. Chowning says this move allowed Summit to grow while still maintaining the company’s original smaller feel and attitude.
“I can call the CEO today and he’ll answer my call. That wouldn’t have happened with some (of the potential buyers), ” says Chowning, who is now the vice president of professional services. “From the initial meeting we had with Emtec, it was apparent that our cultures were really aligned in terms of our goals and the way employees and clients are treated. Their focus on those attributes was important.
“Emtec has what it calls a ‘client for life’ attitude to serving customers, and that was something that I really appreciated, ” says Chowning, noting that the emphasis is on long-term relationships and extension of services rather than one-time sales.
“So from a personality standpoint of the management team at Emtec, we felt like we would fit in well with their style, ” says Chowning. “Then they had the portfolio of the additional services that we were lacking. There were things that some of our clients asked us for and we always had to say no. Now with Emtec we’re able to say yes. We have the skills and the talent to do the work, and Emtec provides us with a larger portfolio of offerings. It’s a win-win for both firms.”
Mergermarket Group lists nine other Alabama-based software startup firms involved in transactions since 2012.
- SourceMed sold in April 2017 to Georgia-based Surgical Information Systems LLC. SourceMed develops software for ambulatory surgery centers.
- Daxco Inc. took a majority investment in September 2016 from GI Partners, based in California. Founded in 1998, Daxco provides software for health and wellness organizations.
- Chesapeake System Solutions Inc. sold in May 2016 to Trintech Inc., based in Texas. Twenty years old at the time, Chesapeake creates financial and treasury management software.
- Malcovery Security LLC sold in October 2015 to PhishMe Inc., based in Virginia, one of the nation’s largest phishing threat management companies.
- JVC America Inc. sold in May 2014 to Cinram Group Inc. of Canada. JVC develops gaming software. Based in Japan, JVC was the first foreign direct investment in Tuscaloosa, arriving in the 1980s.
- Allstates Technical Services LLC sold in October 2013 to Magic Software Enterprises Ltd., based in Israel. Mergermarket valued the transaction at $10 million.
- SuccessEHS Inc. sold in June 2013 to Vitera Healthcare Solutions LLC, based in Florida. SuccessEHS develops software for medical records.
- ClinicAnywhere sold in April 2013 to TekLinks Inc., also based in Birmingham. ClinicAnywhere develops physician practice management software.
- XcitekSolutionsPlus LLC sold in January 2013 to SunGard Financial Systems, based in New York. XcitekSolutionsPlus focused on software to automate corporate processes.
Cary Estes and Tyler Brown are freelance contributors to Business Alabama.
Text By CARY ESTES // Photo by tyler brown
