Here’s why Iress Ltd asked investors to spend $85 million today

With large parts of the Australian market facing limited organic growth and fierce competition, Iress Ltd (ASX: IRE) has become the latest company to make an earnings-accretive acquisition, with the announcement of its purchase of Financial Synergy this morning.

So What?

  • Iress to acquire Financial Synergy, a privately-owned fund management software company
  • Cash purchase price of ~A$90 million, with $85 million funded by capital raising
  • Financial Synergy reported revenues of $27.4 million and Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) of $9.4 million in 12 months to 30 June 2016
  • Transaction is expected to add 2% to Iress’ Earnings Per Share (EPS) in 2017
  • Acquisition expected to complete by 31 October, subject to usual conditions
  • Iress intends to retain Financial Synergy employees and senior management
  • Majority owner and founder David Orford appears to be selling out, but will be retained as a ‘consultant’

The $85 million share raising was conducted for institutional investors at a 4.5% discount to Iress’ closing share price last Friday. Retail shareholders will have the opportunity to participate in a Share Purchase Plan (“SPP”) at the same price as institutional shareholders, except funds raised by the SPP will be capped at $20 million.

The merits of the purchase

Under Iress’ accounting policies, Financial Synergy’s EBITDA last year would have been around $8 million, so the acquisition is valued at 11.5 times EBITDA. Although nothing like the outrageous multiples some other financial software companies have traded on, it is a high-ish price for a private company, and competition in this space is only going to intensify. On the plus side, being owned by a business like Iress gives Financial Synergy a step up in achieving sales and the business could justify its purchase price fairly easy.

Here’s just some of the other companies already offering financial management software:

Every company and its dog wants a finger in the ever-expanding pie of Australia’s wealth management industry, with regulated super contributions leading to rapid growth of the industry. Although a small, parallel acquisition like Financial Synergy makes sense for Iress, it’s important for investors not to get too excited, given the vast number of players already in the market. Competition appears likely to only intensify going forwards.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia owns shares of Class Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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