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ClickSoftware (CKSW): An Early Call on the Manchitra Acquisition


April 7, 2009

Previous articles discussed the strength of CKSW’s business model and the valuation of the stock. As envisioned, the price of the stock appreciated significantly. The possibility and concerns of an acquisition were also raised at that time. This is an early call on the acquisition announced today.


Excerpts of today’s press release follow: “ClickSoftware will acquire all the assets of the Manchitra workforce management business including its product, customers and about 25 employees. All of these assets will be transferred to a newly formed subsidiary - ClickSoftware India Private Limited. Under the terms of the definitive agreement, the consideration for the transaction is about USD 2.65 million which ClickSoftware will pay in cash at the closing of the transaction. The closing is subject to certain closing conditions, and is expected to occur during the month of April.”

"The addition of the newly acquired implementation and delivery arm in India will provide ClickSoftware with a whole new range of benefits to customers and prospects in that region. This will range from swift response to market requests and competitive pricing to support of our system integration partners," said Hannan Carmeli, President and COO of ClickSoftware. "This is one more step towards aligning our delivery capabilities with the vast potential presented by the recently signed agreement with SAP," Carmeli explained. On the corporate front, Carmeli continued, "Manchitra employees bring with them a culture of innovation and a reputation for rapid and thorough response to customers. Their dedication to excellence, continuous improvement and commitment to building relationships of trust with clients are fully consistent with ClickSoftware values."


While acquisitions are often hazardous to the financial health of the acquirer the announcement suggests some positives:

- Rapid continuing organic growth would support the view that the acquisition represents   an addition to existing growth opportunities, not a solution to a problem of insufficient internal growth.

- India is a large market containing both, significant potential demand for CKSW’s services products and a skilled work-force capable of supporting leading-edge product development and expanding sales in the region.

- There seems to be an important tie-in between the announced acquisition, the activities of system integration partners and the strategic relationship with SAP, as mentioned by CKSW’s President and COO in the announcement.

- The acquisition risk seems to be well within CKSW operating and financial capacity.

The scope of the acquisition does not put CKSW’s survival at risk.

(i) The cash price, $2.65 million, is less than 9% of cash on hand at FYE 12/31/08. Based on the rate of accumulation of cash balances in 2008 ($0.57 million/month), CKSW could pay for the acquisition in less than 5 months.

(ii) The price covers twenty-five ready-to-produce employees, plus products, plus customers in a growing market. The trade-off strikes me as reasonable.

Fundamental valuation, adjusted for unfavorable acquisition assumptions ---no sales benefit due to the acquisition, reduction in NOPAT due to the additional expense of 25 new employees --results in a stock value which is still substantially greater than the current market price (trading around $3.98). It could be argued that the assumptions are unrealistic because they only reflect the costs of acquisition and fail to account for any (expected) benefits.


The positives outlined above suggest that the acquisition fits within CKSW’s existing strategy and business model. Based on information available, it is reasonable to expect that the acquisition should contribute to strengthening CKSW’s attributes -- effective user of capital, capable of (internally financed) sustained high revenue and profit growth, while building up surplus cash.

The valuation suggests that --even under assumptions reflective of an unfavorable acquisition outcome --CKSW represents an attractive investment opportunity.

Disclosure: I am long on CKSW.

Please due your own due diligence.