Hiatus. The Merriam-Webster dictionary defines it as, "A period of time when something (such as an activity or program) is stopped." In the M&A arena, going on hiatus can sometimes be the best way for a seller to get an optimal deal when conditions are not advantageous for a sale. That is certainly the case for Corum client AVATA, a leading Oracle strategic partner and services provider of supply chain management (SCM), enterprise resource management (ERP), and enterprise performance management (EPM) solutions. AVATA has significant domain expertise in enterprise applications and is a leading consultant and systems integrator for Oracle cloud software applications.
Corum recently announced the acquisition of AVATA by Rockwell Automation, the world's largest company dedicated to industrial automation and digital transformation. AVATA will be integrated into Kalypso, Rockwell Automation's digital transformation services business, and the combination will help clients accelerate their digital transformation with Oracle's suite of cloud applications.
The deal represents a successful outcome for AVATA, who came to Corum looking to attract an optimal acquisition offer from a solid buyer. But key to getting that result was going on hiatus, that is, taking a pause in the M&A process, and then returning at a later time when conditions are more favorable for a sale. Corum is the only investment banker that offers a hiatus program.
An initial offer
Corum Senior Vice President Alan Wilson was Corum's point person on the deal. He recalls that AVATA became a Corum client in 2016 after attending a Corum briefing session that he led. "AVATA was quite a successful company," Wilson remarked. "At that time their revenues were about $18 million, with significant net income. I think their EBIDTA was about 15-20 percent. They were in really good shape, so I took them to market."
In fact, in short order AVATA got a number of offers from potential buyers. The most serious offer came from a Vietnamese consulting company that was making inroads into the United States. The Vietnamese company underscored its intent to acquire AVATA by flying the four AVATA principals to Hanoi for a week and introducing them to the key decision makers in the company. Things were progressing nicely toward a sale. But as luck would have it, when the principals flew back from their week in Hanoi, they got a note from their Vietnamese suitors saying that they changed their minds. The reason stated was a change of senior management resulting in a termination of all acquisitions. Wilson remembers, "It was a real shock and it caused quite a bit of anxiety by the AVATA principals wondering where they would go from here.”
Compounding this setback was an announcement from Oracle that they would no longer sell on premise licenses, and that only cloud licenses would be sold going forward. Wilson pointed out that consulting rates for cloud licenses were about half of the consulting rates for on premise licenses. Not only was this bad news for AVATA, but it devastated the entire Oracle consulting ecosystem. Wilson said, "These companies could see the Oracle consulting segment disintegrating before their eyes."
These looming obstacles led to a buyout of two of AVATA's principals by another principal, Anil Thomas. The fourth principal retained 25 percent of the company in a passive role. Thomas felt he would be able to reconfigure the company, downsize it, and live in a world of cloud consulting.
Taking a hiatus is a good opportunity to address issues that stand in the way of a good offer. In AVATA's case, no good offers were on the table following the Vietnamese company backout. And Oracle's change in licensing policy seriously clouded AVATA's business outlook. Wilson said AVATA had no idea what the future held for their revenue, and because of that, there was no way they could go to market and make a pitch that would give a reliable revenue projection. Both Wilson and Thomas realized that until Thomas got the business under control, it was futile to go to market. So Wilson took AVATA into hiatus.
While on hiatus, a company can use the time to make the changes it needs to get the M&A result they want. In AVATA's case, necessary structural change was already happening. Thomas was now the CEO. Headcount was reduced and AVATA stabilized its consulting rate in line with the new business reality.
Wilson recalls that it took AVATA more than a year to make the necessary changes. And during that time he and Thomas spoke regularly. Wilson stated, "He was bouncing ideas off me constantly about adjusting his business, things like what would I do under various circumstances. So I became a trusted advisor."
The ongoing communication between Wilson and Thomas reflects one of the distinguishing features about Corum. All their dealmakers are ex-CEOs. They have years of experience building companies from scratch. And they are able and willing to lend their advice and guidance to clients. Wilson remembers, "It was based on that experience that Anil Thomas and I developed a relationship. Every quarter over the next two years we checked in with one another. I was happy to give him advice and guidance while he was on hiatus, and I knew at some point in time I would be able to take him back out of hiatus and into the market.”
Back into the market
The event that set things in motion for AVATA's return to the market occurred six months ago, when Thomas told Wilson he had received interest from another consulting company to buy them. Wilson advised Thomas that having one interested buyer is akin to having no buyer because it gives the seller no leverage. In reality, a seller's best opportunity to get an optimal result is to have multiple potential buyers bidding against each other. Wilson realized that it was time to bring AVATA back into the market and get additional potential buyers into the mix.
Wilson was aware that Rockwell Automation, a company that in times past had been focused on factory floor automation, was building a consulting business. So he called them to gauge their interested in acquiring AVATA. According to Wilson, "When I called them, they said yes, we'd love to take a look at this company. They immediately became engaged and it became obvious to me that we should accelerate the process. So I gave Rockwell and the other consulting company a deadline to have an LOI to me."
Rockwell Automation ultimately acquired AVATA. However, that did not happen immediately. They wanted to form a partnership with AVATA and that's what they did initially. Rockwell Automation had recently acquired Kalypso and they saw a partnership between Kalypso and AVATA as an opportunity.
Wilson wanted to turn that partnership into an acquisition, so he pointed out to Rockwell Automation that he already had an offer for AVATA from the other consulting company, and the partnership would not continue if indeed the other consulting company bought them. A week later Rockwell said yes about making an offer to acquire AVATA, and an offer was in place within seven days. No purchase price was announced, but Wilson stresses that the deal was an optimal one for AVATA. Thomas owned 75% of the company, so he got 75% of the sale proceeds. Thomas also wanted to ensure that every consultant on his team benefited from the transaction, and put in place an employee retention program.
The benefit for Rockwell Automation is the integration of AVATA into Kalypso, something that it wants to build on, and an effort that will lead to a wider range of consulting opportunities for AVATA’s team. In short, Rockwell Automation wants to become a go-to digital transformation company for the entire enterprise, including supply chain and manufacturing, and the competency offered by AVATA, will help drive it.
Going on hiatus was a winning strategy for AVATA. However, Wilson points out that even if a Corum client doesn't wind up selling, the experience of going through Corum's proven M&A process is valuable. He says, "Even if your company is not sold, you’ll learn from the feedback you get from the market. And if you do go on hiatus, you'll be able to use what you learned to readjust your business ‒ your market positioning, your sales process, and your product strategy ‒ in line with what potential buyers say to you.”