Is Reckon Limited (ASX: RKN) the next takeover target in the information technology space? This certainly looks to be the case with the accounting software developer surging to a more than three-month high today after management confirmed it had hired Macquarie Group Ltd (ASX:MQG) as its advisor.
It's reported that the company has fielded at least one takeover approach from a trade buyer or private equity group, according to the Australian Financial Review, although Reckon has refused to confirm the news.
As the saying goes – you sometimes say more by not saying anything – and the 13.5% surge in its share price to $2.19 suggests the market is giving credit to the rumours.
While investors shouldn't indulge in speculation, I think there are a few good reasons why Reckon would appear attractive to a suitor.
Its subscription revenue is growing fast and total recurring revenue stands at $36.2 million for the six months to end June 2015, which represents around two-thirds of total revenue.
The stock is also looking cheap as most investors have taken Reckon off their watch list to chase higher profile rivals such as XERO FPO NZ (ASX: XRO) and recently listed Myob Group Ltd (ASX: MYO) to such a point that the two have market capitalisations of around $2 billion each, compared with Reckon's $246 million market weighting (and that's with today's share price surge!).
What's more, Reckon is looking like a bargain on a forecast price-earnings multiple (P/E) basis with the stock trading at 14x consensus 2016 estimates (its financial year is the same as the calendar year), when MYOB is on 21x.
Forget about XERO's P/E. It doesn't have one as it isn't expected to turn a profit for some years yet.
However, detractors will point out that Reckon is sitting on a pretty big debt load of $41 million compared to its equity base of $33.5 million, which could turn potential suitors off or at least prompt them to make a takeover offer at a discount to account for the debt.
This means Reckon is sitting on an enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) of nearly 14x – and that doesn't look like a such a bargain to bidders, although it isn't so high as to put everyone off.
The fact is there is a lot of merger and acquisition activity on the market with record low interest rates, a weak Australian dollar and cashed up bidders lurking. The IT sector is getting its fair share of corporate attention and you only have to look at UXC Limited (ASX: UXC) for a recent example.
Private equity raiders are also comfortable with the accounting software space. MYOB used to be owned by Bain Capital before it was floated in May this year.
But it's never a good idea to chase a stock mainly for its takeover appeal and I don't see a lot of value in buying Reckon at these levels unless I was sure it will attract a takeover bid at a substantially higher price.
Instead, I would prefer to target IT stocks like Empired Ltd (ASX: EPD) or even Netcomm Wireless Ltd (ASX: NTC) for their fundamentals.
