ACG Interview With David Stienes on I-many Take Private Transaction
Showcasing ACG Member Deals
Interview With: David A. Stienes, Principal, LLR Partners
ACG: What is I-many's business and history?
DS: I-many was founded in 1989 to focus on contracting and compliance solutions for the life sciences industry. Today, I-many products manage the entire contract life cycle, from pre-contract processes (authoring) and contract management to active compliance, contract optimization, demand channel visibility and control. The Company has emerged as the market leader in the life sciences contract management and administration domain. The Company began in this key sector and today serves the top 10 largest pharmaceutical companies, 23 of the top 25 largest pharmaceutical companies, and more than 80% of the top 100 largest pharmaceutical companies in the world. In addition to leading the life sciences sector, I-many additionally serves over 35 companies worldwide across 19 other verticals, including 25% of the Fortune 50. In total, I-many serves over 250 companies worldwide across 21 verticals.
ACG: What was the impetus for the transaction?
DS: Like many companies at the time, I-many rode the tech boom and went public in 2000. Over time, research coverage shrank and the trading volume became very light. In order to fund several acquisitions and the development expense of ContractSphere, its next generation platform product, I-many raised $17.0 million of convertible debt in December 2007. The debt had certain performance requirements, including that the Company maintain its NASDAQ listing. In the fall of 2008, deteriorating conditions in the world economy, the Company’s results of operations and the market for the Company’s common stock placed the Company out of compliance with the continued listing standards of the NASDAQ Capital Market. This compelled I-many to explore strategic alternatives to the possible accelerated repayment of the $17 million of senior convertible notes, including a complete sale of the business.
ACG: How did you become involved in the deal (e.g., direct sourced, intermediary, etc.)?
DS: We were introduced to the transaction by Montgomery & Co, who was engaged by the Board to pursue alternatives for the Company.
ACG: What made the Company an attractive acquisition candidate?
DS: Software and Information technology has always been a focus of our firm. With the closing our $803 million third fund in July 2008, we added additional technology expertise to our team. Greg Case joined us in 2008 after spending most of his career investing in the technology sector with Apax Partners, where he ran the growth technology investing practice in the US. Also, we added Paul Winn as an operating partner. Paul was CEO of Princeton Softech, an LLR I investment, and has successfully built similar software businesses in the past.
LLR is a later stage fund, so it is not in our nature to take significant product risk around technology adoption. Our technology deals fall into two categories: (1) businesses with proven products (and thus some stability to the revenue stream through maintenance and subscription agreements) that may be lacking clearly defined growth strategy and need assistance with sales and marketing, branding and overall vision or (2) platform businesses with a strong customer base looking to expand through acquisitions that add enhanced functionality or additional vertical market expertise.
With I-many, it was evident to us that the Company possessed a strong product portfolio, but was experiencing execution issues in going to market. We validated that the Company's core product offering was the clear industry leader, was mission-critical for the customer, and had a clear ROI. The core product was also "current" given that the Company had recently completed over $40 million of investment in ContractSphere, its next generation product suite, which significantly expanded functionality and added many new capabilities.
However, by late 2008/early 2009, the business was in a difficult position as the product launch for ContractSphere was delayed and the go-to-market strategy was never fully developed. As such, the market for new license sales was essentially frozen. This led to significant operating losses in 2008, a time when the markets were not very accommodating. To off-set the sales decrease, the Company underwent a large restructuring effort that dramatically reduced the sales and marketing function.
While we were very comfortable with sales execution risk, the unusual part of the deal for us was the lack of a full-time CEO. At the time of our deal, the CEO was a former Board member who had been placed as an interim CEO twelve months prior. We typically back existing management and add talent over time as we execute on the plan. We were able to get comfortable with I-many's situation due to having a successful CEO (Paul Winn) as part of our team. Paul was actively involved in diligence and worked with the existing managers - while there was no long-term CEO, the Company did have a core of talented executives in many functional areas - to develop the go-to-market plan and long-term strategy for the Company. We closed the transaction with Paul as interim CEO. Since that time, we have leveraged our network and quickly expanded the management team, beginning with the hiring of former Bluestone Software CEO Kevin Kilroy to be the Company’s new CEO and then hiring a Head of Global Field Operations, a VP of Information Systems, a VP of Global Marketing and a VP of Channel Business. Paul Winn continues to serve as Executive Chairman and joins Greg Case on the Board.
ACG: Was it a competitive bidding process? If so, what other types of companies were involved in the auction (e.g., private equity, strategic, or both)?
DS: Being a public company, the Board’s fiduciary duties ensured it was a competitive process. The pending NASDAQ delisting and subsequent debt conversion added urgency to the process and certainty of close was a critical concern of the Board. Communicating through the banker and the Board, we never knew the competition. We felt pretty strongly that our main competition was strategic, but this was never validated. In reviewing the proxy, the initial contact list included 88 firms, with 12 getting to management meetings and ultimately three serious bidders by the end of the process.
Given the de-listing pressure, we felt we could differentiate ourselves by moving quickly. We engaged senior LLR resources like Greg and Paul early and often in the process and also tapped our network to access senior-level diligence resources (former CIO’s, CTO’s and senior marketing executives). This allowed us to quickly form an investment thesis that we took back to the firm for approval. As such, we offered a credibility and certainty of close to the Board that we believed few other firms would be able to match.
We were the announced acquirer on April 29th at $0.43 per share. You can follow it all in the proxy, but we were involved in an active bidding process both before and after the public announcement. Post the announcement, we increased our bid three times - to $0.49 per share, then $0.52 and then finally, on June 10th we once again matched the other bidder at $0.61 per share, representing an enterprise value of $54.75 million ($46.75 million after factoring in cash on the balance sheet). We held the shareholder vote and closed in July.
Over the course of this protracted, and very public, bidding process, we had to continually re-affirm our investment thesis. We relied heavily on Paul Winn’s operating experience and leveraged our network of channel partners and strategic relationships to validate I-many’s value proposition and gain greater comfort in the upside potential of the business. We continually matched the other bidders, sometimes under very tight time deadlines. Here it was critical that we underwrote the entire deal with equity. As such the only decision makers we had to confer with were our Investment Committee, comprised of active partners in the firm. We were able to quickly pull the group together and make counter-offers within the required windows.
ACG: What were some of the added complexities associated with acquiring a publicly traded company in a going private transaction?
DS: The purchase agreement negotiations are actually a bit simpler, with different areas of emphasis from a typical private M&A transaction. Since there is no indemnification and all reps and warranties die at closing, you avoid the typically difficult discussions around escrows, reps and warranties, knowledge, etc. This lack of post-deal indemnification does create a higher level of scrutiny around your diligence. The main points of contention in the purchase agreement negotiations are around conditions to closing. Obviously the Board wants to limit the buyer’s ability to walk. Therefore, you spend a significant amount of time negotiating the material adverse event definition and closing conditions. However, being in a competitive process negotiating with a Board that is highly sensitive to fiduciary responsibilities, there is not much room to negotiate.
The deal dynamics are also quite different. There is significant case law supporting the fact that the Board’s paramount concern must be maximizing shareholder value at the sale. This takes much of the human element out of the deal. In most of our transactions we spend a considerable amount of time with management, and many of those individuals will be the ultimate decision maker on the winning bidder. The choice of a private equity partner will factor in the treatment of management and the best interests of the business going-forward. In this process, despite developing an excellent relationship with the existing team and crafting what we believe to be great growth strategy, price and certainty of close were the only real factors in the Board’s decision.
By far the most difficult part of the transaction that is unique to the public forum is the seemingly endless, and very public, bidding process. After completing our diligence and striking a deal at what we thought was a reasonable valuation, we ended up in a two-month bidding process. From LLR’s perspective, this continued process of re-evaluating our investment thesis and affirming our conviction was draining, time-consuming and frustrating. During this period, we were unable to begin implementing some of the required changes we deemed necessary. For I-many’s customers and employees, it was also a difficult and uncertain time, with few decisions able to be made until the ultimate new owner was established. Thankfully, compared to some of the other going-private transactions that have taken place this year, our process was comparatively short.
ACG: Did you use any type of debt financing to fund the transaction?
DS: Not prior to closing. In order to provide the highest certainty of close, we chose to fund entirely with equity vs. attempting to get a full lender commitment in the midst of such uncertainty in the credit markets. We did begin conversations with several groups prior to closing, especially as the purchase price increased, and were comfortable we could put something in place post-closing. We are in discussions now on a credit facility that will provide a working capital line as well as a term loan that will be applied towards the purchase price.
ACG: Will the Company be combined with an existing enterprise or will it serve as platform for growth? What is your growth strategy for the Company going forward (e.g, organic growth, acquisitions, etc)?
DS: I-many will be a standalone platform for growth. We are very excited about the Company’s strategic positioning. We feel there is significant revenue growth available within its core life sciences market, and we have accelerated product development in this area. Furthermore, the sophistication of the Company’s contract administration and compliance solutions resulting from serving such a large, global customer base will be readily transferable to other industries. We feel that contract and regulatory compliance will be an area of increasing importance in many other industries and I-many is uniquely positioned to address that need. The Company had already made in-roads into several other verticals, but was forced to slow those efforts in 2008. We look forward to re-starting that aspect of potential growth. As always, we will selectively evaluate acquisitions, particularly as we look to expand our product offering (within and outside of life sciences) and determine the proper buy vs. build mix. We have a very strong balance sheet and LLR III is an $803 million fund with significant follow-on capital available if needed to support acquisitions.
ACG: Were any other local deal professionals involved in the deal? If so, are any of these professionals ACG members?
DS: We relied heavily on Pepper Hamilton throughout this process, namely Brian Katz and Bruce Fenton, who is an active ACG member and Member of the Philadelphia Chapter Board. Many of the bidding situations had tight timelines and "Friday at midnight" deadlines that we took right to the limit. They were both readily accessible late into the night and all weekend, and were able to locate subject matter experts as needed, typically within an hour or two regardless of day or time..