Illinois Tool Works' Click Commerce Acquisition is a Strange, Strange Deal

Includes: CKCM, ITW
by: Jason Wood

Admit it, every time IBM (NYSE:IBM) makes an acquisition these days, can't you just picture Larry Ellison throwing something off his yacht in disgust and using his satphone to call Safra and Chuck wanting to know why THEY didn't buy that company? It's a funny thought, whether or not it's a rough approximation of the truth.

While Oracle (NASDAQ:ORCL) and IBM have gotten a lot of press for their software acquisitions of late, obviously they're not alone as the M&A landscape has never been hotter. HP (NYSE:HPQ) is getting into the act, lots of smaller vendors are combining with one another, and private equity firms are getting more serious about their efforts in the tech.

So while we should continue to expect lots of different dance partners buying and selling in the next few years, did anyone see this coming: Illinois Tool Works (NYSE:ITW) to acquire Click Commerce (CKCM)?

I've seen a lot of software acquisitions, some that made sense, some not so much. But few have left me scratching my head more than this one. ITW's modus operandi is to acquire complementary businesses and run them independently, while applying a series of global financial, governance and process controls. The company abides by its own "80/20" rule which essentially pushes its subsidiaries into focusing on its most profitable customers (i.e., the 20% that generate 80% of profits) while eschewing the others over time (to generate better margins and ROIC).

So what does ITW have planned for CKCM? This deal is curious for several reasons:

  • Illinois Tool Works generates $12.8 BILLION in revenues; CKCM generated just under $80 million in the last four quarters
  • ITW operates more than 700 business units; CKCM is the first software company in the portfolio
  • ITW is paying $292 million in cash, slightly more than 4x EV/sales; This is a massive premium to ITW's typical acquisition
  • Over the last four quarters, ITW has acquired $786mm in annualized revenues, and paid $802mm:

  • Q2'05 -- $36mm revenues acquired for $12mm (0.33x)
  • Q3'05 -- $105mm revenues acquired for $113mm (1.08x)
  • Q4'05 -- $292mm revenues acquired for $314mm (1.08x)
  • Q1'06 -- $353mm revenues acquired for $363mm (1.03x)
  • TTM -- $786mm revenues acquired for $802mm (1.02x)
  • Yet, ITW was willing to pay more than 4x EV/sales for CKCM... to what purpose? If this signals ITW's foray into more software acquisitions, it could simply be an indication that the ITW management (who have been excellent at identifying targets for profitable acquisition) see value in some of the manufacturing-centric software assets out there on the market. Whether the acquisition provides CKCM with any near-term incremental opportunities (or challenges) remains very much in question; but something tells me Oracle and IBM don't have to worry about ITW causing more intense bidding wars.

    At the time of this writing I, and/or funds I maintain discretionary control over, did not maintain an equity position (long or short) in CKCM, IBM, ITW but did maintain a long equity position in ORCL.We also may, at times, carry derivative options on underlying positions as a hedge.