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An acquisition saves a software company from crushing leverage.
Vincent Ryan, CFO Magazine
August 1, 2012
Acquisitions have killed many companies, but Infor may be one of the few saved by one. Leveraged to the hilt two years ago, the company, which makes enterprise-resource-planning software, has returned from the brink of a major restructuring. A merger with fellow ERP software vendor Lawson Software, combined with an injection of equity capital, was the key factor in Infor's revival.
"I think a lot of people thought the endgame would be bankruptcy or some kind of negotiated restructuring with existing lenders," says Infor CFO Kevin Samuelson. But Infor avoided that outcome.
How did Infor get so deep into debt? In 2006, it was a four-year-old company owned by private-equity firm Golden Gate Capital and humming along at a good clip. But that year it spent $2.5 billion on acquisitions in a short period of time. The credit markets had opened up to software firms, recalls Samuelson; "the debt was incredibly inexpensive, and we could get as much as we wanted." So Infor went from financing acquisitions almost entirely with equity to "a more traditional leveraged-buyout-type capital structure," he says.
The company's pro forma leverage after the 2006 deals was 6.5 times EBITDA (earnings before interest, taxes, depreciation, and amortization). Then the economy nose-dived, and Infor suffered large declines in EBITDA and profits, pushing its leverage to 10 times EBITDA. Although servicing debt was never an issue, "the ability to refinance debt certainly at anything approaching 10 times was off the table," says Samuelson.
By December 2010, Infor had a new management team and profits were growing again. But that didn't solve the capital-structure problem: Infor was still more than nine times leveraged. The company considered several options for right-sizing its capital structure and chose one true to its history: acquire a company that Infor and Golden Gate could "overequitize" and combine with Infor to bring leverage levels down, Samuelson says.
Lawson to the Rescue
Publicly held Lawson Software, with $800 million in revenues, had the scale to help fix Infor's capital structure. But a take-private transaction for Lawson still would not have brought Infor's leverage down to a level that was "palatable in the capital markets," says Samuelson. And as the company was trying to close the deal in 2011, the earthquake in Japanese occurred and the euro-zone crisis flared up, making the debt markets difficult again.
As a result, Golden Gate Capital financed the $2 billion Lawson unsolicited takeover separately and kept the company a stand-alone entity. But the PE firm eventually combined the companies this year, after it and Summit Partners kicked in $1 billion of new equity. Infor used $600 million of that sum to pay down debt. At the same time, Infor obtained a $3.4 billion first-lien bank loan and raised $1.9 billion in a public bond issue, one of the largest post-credit-crunch refinancings in high tech.
Those transactions lowered the leverage of the combined Infor-Lawson to 6.5 times EBITDA. The addition of Lawson's cash flow also helped. Infor now has a window of six years before any meaningful maturities and $350 million to $400 million of free cash flow after debt service. The company is now looking to spend heavily in international markets in the next 18 months, and going public is also on its radar screen. "With the proceeds of an [initial public offering], we could pay down debt and get to a more normalized public-company debt level," says Samuelson. For Infor, at least, there is life after debt.