It would be an understatement to say that Deltek, the leading global provider of enterprise software and information solutions for professional services firms and government contractors, has had an interesting journey since it was founded in 1983 by the deLaski duo of father and son. In 2005, the original founders sold their majority ownership and gave up day-to-day involvement in the company, and Deltek was recapitalized by a private equity organization called New Mountain Capital based in New York, NY. The software company went public again in November 2007.
In late August 2012 came the announcement that another New York City investment firm, Thoma Bravo, will be acquiring Deltek for US$1.1 billion, or US$13 per share. Thoma Bravo is a highly regarded private equity firm with a reputation for investing in successful growth-oriented companies and investing in those companies to accelerate their growth strategies. The firm’s previous asset success stories include JDA Software and Activant (now Epicor). You can read the official press release here.
Good or Bad?
Deltek has portrayed this transaction as good news for its customers, partners, and shareholders because the company has found a terrific partner for the next phase of Deltek’s growth. But not everyone shares this enthusiasm, and some question whether Thoma Bravo got a good deal or overpaid. Indeed, $1.1 billion for a company with $345 million in revenues and somewhat lower profits of late (in part due to its own acquisitions) might seem a bit high. On the other hand, some shareholders are considering a class action lawsuit against Deltek for undervaluing its stock.
Moreover, a few market observers comment that “struggling Deltek” has been “significantly underinvesting in its product lines.” I don’t know whether their comments came from an intimate understanding of Deltek’s state of affairs or are based on a hunch. To be fair, it is not a common lifecycle for any company to go public and be taken private twice. I also agree that a few of the most prosperous product lines get most of the research and development (R&D) money while the rest are underfunded. This is true of most enterprise resource planning (ERP) vendors. Unfortunately, while this is a good product management decision, the underinvested product lines generate bad press.
But this is not necessarily the case with Deltek: Maconomy was purchased two years ago and Deltek is releasing the next version early next year. Costpoint 7 was released less than a year ago. Deltek First is for government contractors and is a souped-up cloud version of GCS Premier, while PM Compass is the command center for all Deltek Enterprise Project Management (EPM) products. The vendor has invested heavily across the board, even delving into the social collaboration/productivity world with the upcoming Deltek Kona product.
Why It’s a Good Thing
While some folks might be rightfully perplexed by Deltek’s history of going public and going private twice, it is all about how the financial game is played by investors and private equity firms. The company grew under New Mountain Capital from about $150 million in 2005 to almost $350 million in 2012, and Thoma Bravo doesn’t buy companies if the firm doesn’t think the asset can continue to grow. This is simply a case of a seasoned private equity firm buying a company from another private equity firm. New Mountain Capital had held the investment for seven years (which is an industry average).
Deltek was not doing badly at all, and that’s why its price was hefty. Maconomy and the government intelligence services (Input and FedSources) were great acquisition deals under New Mountain Capital, given that Deltek for the first time in its history has true international presence (via Maconomy) and knows about every possible deal that is in the United States (US) government pipeline (via the Deltek GovWin IQ intelligence subscription offering). I seriously doubt that there will be such crippling cuts to the US defense budget as to throw Deltek’s market into an upheaval.
Several years back, Deltek acquired Welcom (with Open Plan and Cobra as some products) and Micro-Frame Program Manager (MPM) from Planview, which gave the company Oracle Primavera and Microsoft Project-like project scheduling capabilities. Even more important, with these acquisitions, Deltek has become by far the best solution for earned value management (EVM) reporting, which is critical for government contractors (GovCon) businesses that are subject to impromptu government agency audits. In fact, Deltek is not necessarily being used by US government agencies, but rather by the contractors working with the government. And especially in tough times these companies need to be careful about billing government agencies, which are in turn under the watchful public eye.
Great Last Quarter
The acquisition by Thoma Bravo was preceded by the financial results from Deltek’s Q2 2012 earnings announcement that the company issued in late July 2012. Overall, Q2 was a very good quarter across the board, with the following highlights that might explain Thoma Bravo’s willingness to pay:
At the time, Deltek also outlined important sales and product development highlights, including the following:
Given its top-of-the-line market share in government contracting, Deltek has been a thorn in the flesh for SAP, Infor, and Oracle in the overall public sector market—any one of them might decide to snatch up the company at some stage. Or Microsoft or IBM could swoop in if they cared for that space. Judging by its past investments, Thoma Bravo tends not to keep its assets for too long.
The Deltek Insight 2012 user conference in mid-October 2012 could not come at a better time. I’ll soon be posting my conference previews discussion with Patrick Smith, vice president, corporate marketing and communications at Deltek. Your comments, thoughts, suggestions or individual experiences with Deltek’s products are welcome in the meantime. For more information, see also Deltek’s profile in TEC’s IT Showcase.
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