Acquisitions have killed many companies, but Infor may be one of the few that were saved by one.
Leveraged at 9 to 10 times earnings two years ago, Infor, an enterprise resource planning software company, is back from the brink of a major restructuring. And a merger with fellow ERP vendor Lawson Software, combined with an injection of equity capital, was the key ingredient.
“What we pulled off is fairly rare,” says Infor CFO Kevin Samuelson, a former banker who joined the company in 2002. “I think a lot of people thought the endgame would be bankruptcy or some kind of negotiated restructuring with existing lenders.” But Infor avoided that outcome.
How did Infor run off the tracks? In 2006 it was a four-year-old company owned by private-equity firm Golden Gate Capital and built on numerous acquisitions. Infor was humming along at a good clip when in a short period it spent $2.5 billion on acquisitions. The credit markets had opened up to software companies, and “the debt was incredibly inexpensive and we could get as much as we wanted,” says Samuelson. So Infor “went from doing acquisitions with almost entirely equity financing to a more traditional leverage-buyout-type capital structure.”
The company’s pro forma leverage after the 2006 deals was 6.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA). “We had offers to go up over 7 times, and could have done a lot more debt financing,” Samuelson says. “As we looked at our trajectory and growth rates [6.5] didn’t seem too challenging, and given our cash flow servicing the debt was a nonissue.”
Then the U.S. economy nosedived, of course, and Infor suffered large declines in EBITDA and profits, pushing its leverage to 10 times EBITDA. “There were never any [debt-servicing] issues, but there was a question as to whether or not there was any equity value,” Samuelson says. With the meltdown of financial markets, “the ability to refinance debt certainly at anything approaching 10 times was off the table,” he adds.
Fast forward to December 2010, and Infor hired a brand-new management team, including Charles Phillips, former president of Oracle. With a new strategic focus on products, the company grew software licenses at a mid-to-high-teens rate and boosted its margins. But that didn’t solve the capital-structure problem: Infor was still “north of nine times levered,” Samuelson says.
Infor looked at several options to right-size the capital structure. The first was to try to raise a huge amount of equity and negotiate with its lenders to write off some of the debt. But despite a good relationship with Infor, the lenders might have resisted. “That made sense in theory, but private lenders are more than happy to own good businesses, so that was a tall order,” says Samuelson.
Option two was to try to grow into the capital structure. But the macroeconomic landscape had not been terribly compelling the previous two years, and Infor had a large maturity wall in December 2013. “That’s not a lot of runway to grow into a 9.5 times EBITDA capital structure,” Samuelson says. “So that was a fairly high-risk choice.”
The third option was the one Infor ultimately took, and it was rooted in the fact that Infor and Golden Gate had built the company by doing more than 30 acquisitions. This alternative was to acquire a company that Infor and Golden Gate could “overequitize” and combine with Infor in order to bring leverage levels down to something more manageable, Samuelson says.
Publicly held Lawson Software, an $800 million revenue ERP business also focused on vertical industries, 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, particularly the debt markets,” Samuelson says. And as Infor was trying to close on the deal in 2011, the Japanese earthquake occurred and the euro zone crisis flared up, making the debt markets difficult again.
So Golden Gate Capital financed the $2 billion Lawson unsolicited takeover separately and kept it a stand-alone entity. That Lawson wouldn’t become part of a highly levered company also made the deal more attractive to Lawson shareholders.
But Golden Gate was eventually able to combine the companies this year after raising $1 billion in new equity from Golden Gate and Summit Partners, $600 million of which was used to pay down debt. At the same time, Infor received a $3.4 billion first-lien bank loan and a $1.9 billion public bond issue, one of the largest post-credit-crunch refinancings in high tech.
Those transactions brought the combined Infor-Lawson down to 6.5 times debt-to-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.
With the new capital structure, Infor has lots more flexibility as it relates to investment. During the next 18 months, the company is looking to spend heavily in international markets, including Brazil and China. “The BRIC countries are a big focus for us,” says Samuelson. “We can get more aggressive there and invest ahead of the curve.”
In addition, going public is now on Infor’s radar screen, or at least it is more probable. “With the [initial public offering] proceeds we could pay down debt and get to a more normalized public-company debt level, which was not possible at nine times leverage,” Samuelson says.
Whether the company goes public or stays private, the important thing is Infor now has “a long runway to execute without worrying about [its] capital structure,” Samuelson says. And “taking the risk of acquiring Lawson — even though we weren’t sure how the companies would be put together — was an important factor.”