In 2004 IBA and Torex Chief Executive Chris Moore appeared to have a plan to work together to open European markets for IBA in exchange for some of IBA’s UK assets. Mr Moore, currently assisting the Serious Fraud Office with their inquiries into Torex’s novel accounting methods, decided merging some of his empire with iSoft - thus handing them various Torex assets in Australia which competed directly against IBA - was a better idea. With fingers in competing pies, both of which he helped cook, one might think “conflict of interest”. Mr Moore would disagree.
Fast forward to 2007 and IBA’s busy (and apparently resident) investment banker is putting together the imaginative finance to consolidate its home base with the aforementioned iSoft/Torex assets as well as expand into the UK via iSoft’s large, mature and eminently exploitable (upgrades, service and support) install base. Coupled with IBA’s promising operations and expansion plans in the mid-east, South Africa and the Asia-pacific basin the combination is attractive.
However, IBA is only a £200m market capped company with forecast revenues to end June 2007 of £30m. IBA has, therefore, to find its own total worth again to take iSoft on board. That means a paper deal. Setting aside the bulk of academic studies concluding that paper mergers under perform cash offers by a long shot, it is the significant integration risks that the relatively poor and untested-to-this-magnitude IBA would find on its plate that concern. All in all, little margin is left for error given the resources the firm can marshal to the cause.
Conceivably, IBA might sell part of iSoft’s continental European operations to help the re-financing negotiations it would have to enter into to fund the new beast. These are probably worth (gross) between £45m and £55m on the iSoft balance sheet (they are not broken out). Whether the opportunity cost of that sale would be less than the promises of IBA’s nascent Malaysian, Chinese et al activities is an interesting question: but to be compelled to sell any strong, established operational arm would be a shame.
For all its trouble, iSoft is still going to turnover circa £175m to end April 2007. What it is missing is cheap working capital of £40m to £50m per year for three years in order to unwind the obligations previous management took on for upfront payments that they subsequently recognised as revenue (wrongly) and spent. This requirement equates to a bridging loan; and post-bridge what materialises is a market leading UK asset base, robust German and Dutch operations and something small but attractive in Spain.
It would be a surprising missed chance for the likes of deeper-pocketed Cerner, Mckesson and Philips (and even, dare it be thought, a dark horse like SAP) if they did not extend hitherto short arms and make the deal instead. Do they really want a new ultra-competitive Australian competitor on their doorsteps?
World Cup Cricket viewing from 13 March may help them decide.
The writer holds iSoft equity.