Allocate Software (AIM: ALL) has agreed a deal to acquire Dynamic Change Ltd, a UK-based Software as a Service (SaaS) provider, for up to £9m paid over three years. The company will make a £5m upfront payment, £4.9m in cash and £100,000 in shares, which will be followed by contingent payments up to a maximum £4m payable in cash subject to certain conditions.
"With this acquisition we continue to broaden Allocate's application portfolio for the healthcare sector which will now include regulatory compliance, corporate governance, risk and performance management. We will also gain domain expertise in Software-as-a-Service,” Allocate chief executive Ian Bowles commented.
“We believe this is an attractive opportunity to achieve additional visibility in our top-line growth and increase our recurring revenue base."
Staffordshire-headquartered Dynamic Change provides regulatory compliance, corporate governance, risk and performance management for the UK healthcare market. In the financial year ended 31 March 2010, Dynamic Change generated total revenues of approximately £3.2 million, and achieved EBITDA of approximately £0.5 million, representing an EBITDA margin of approximately 16%. As at 31 March 2010, Dynamic Change had 121 healthcare customers.
The £4m in contingent payments will be payable based on Dynamic Change’s performance over the next 3 financial years. To receive any further payment, Dynamic Change must achieve at least 15% compound annual growth in run-rate subscription revenues. In respect of the full £4m payment, Dynamic Change must achieve at least 25% compound annual growth in run-rate subscription revenues in the three year period.
Allocate expects the acquisition to be significantly earnings enhancing in the first full financial year, furthermore the company believes that Dynamic Change's SaaS business model, boasting high levels of recurring revenue, will provide the enlarged group with improved visibility on future revenues.
Dynamic Change’s principal software is the ‘Performance Accelerator’ SaaS platform, a single platform accessed via a web browser. The platform incorporates all applicable regulatory standards and obligations for Dynamic Change's healthcare customers, and as such content is maintained by Dynamic Change on an on-going basis.
The ‘Performance Accelerator’ is used to monitor and manage regulatory compliance, corporate governance, business objectives, risks and controls, performance indicators and financial targets. According to Allocate, it has conducted detailed technical due diligence, and it believes that the technology architecture is robust and scalable for significant organic growth.
“There are expected to be opportunities to generate incremental revenues from the penetration of Allocate's customer base with Dynamic Change's Performance Accelerator product. The board believes that there is significant potential for growth within the UK healthcare market, through new customer wins as well as continuing to grow the number of users at existing customers,” Bowles said.
Furthermore, Allocate believes there is the potential for Allocate to use its global reach to take the product, in due course, to certain international markets.
In response to the announcement, London-based stockbroker Astaire Securities highlighted that the acquisition further broadens Allocate’s application portfolio for the healthcare sector, and it brings the company up to speed in SaaS. According to Astaire, the compliance market has remained a resilient, and it expects to further growth. "With a single central code base, one would expect margins to increase rapidly as the number of subscribers increase."
In March, in its Q3 interims, Allocate reported its strong progress during the current year, highlighting its expansion into Australia and New Zealand and stronger presence in the Nordic region following the acquisition of Time Care AB.
In the third quarter, the company was busy winning new contracts, landing its first e-Rostering contract award under LPP and eight NHS contracts for MAPS Healthroster to take the total NHS e-Rostering customer base to 105 trusts, of which 69 acute trusts, 21 mental health trusts and 15 primary care trusts.
This included the first Healthcare contract win in New Zealand for MAPS Healthroster and the first Healthcare contract win in Australia for MESaLS as well as a major services contract awarded by NATO to deliver new mission-important system capabilities for Allocate's existing Special Forces MAPS deployment.
The Time Care acquisition was closed in December, paying £8.7 million for the company. Allocate expects the deal to help achieve its goal of driving organic growth at over 20% per annum and to move operating margins towards 20%, which broker Edison Investment Research said could drive the group’s value through £50 million, supported by a stock valuation of 100 pence per share.
Time Care AB has landed 17 new contracts during the third quarter.
Disclosure: The author holds no positions in the company