In uncertain times, most people will tell you that cash is king. A case in point is Brady Plc, a global trading, risk management and settlement services provider serving the metals and commodities industries, which by the end of August had amassed a cash balance of some £7 million.  

The IT software and services company, which floated on AIM in 2004 and has a market capitalisation of almost £14 million, is using a surfeit of cash to scale up in the niche metals market. To this end, Cambridge-based Brady acquired Commodities Software, a privately held supplier of raw material IT software, earlier this year in a move that is set to increase its competitive edge and broaden its technology portfolio.

Comsoft, the owner of Aquarius – an IT software that manages metal assets from raw materials at the mine to refined finished products – carried a £1.5 million price tag, which will be satisfied with an initial cash payment of £725,000. The deal also includes a deferred element of up to £775,000 dependent on the Hastings-based company’s future performance.

Bright and boyish in his London home, Brady CEO Gavin Lavelle observes that the commodities and metals space is highly fragmented, offering huge scope for consolidation. He says this small acquisition strengthens Brady’s position in the market as the only supplier of trading and risk management software and services for both the refined and unrefined metals industry.

Lavelle says: “The acquisition is a milestone in our strategy of being the definitive global provider of risk management and settlement services to the metals and commodities industries.”

Brady’s clients are the world’s largest mining and resources companies, including Rio Tinto, Xstrata and Glencore.

The deal scene
Like other industries, the technology sector has not escaped the downturn. M&A activity in this sector dropped 17 per cent in 2008. For the most part, the decline came in the last quarter of the year, when activity levels fell by 40 per cent as confidence was drained from the market, according to Icon Corporate Finance.

Although mega-deals are off the agenda in this sector, the technology-focused advisory firm remains upbeat about small and mid-market transactions, such as Comsoft, which it says accounts for over 95 per cent of all takeover activity.

It observes that the technology industry is generally cash flow positive and positioned to step up acquisitions. “Tech acquirers generally do not rely on bank debt for acquisitions, and as cash purchasers, current conditions can present some excellent buying opportunities.”

Lavelle tends to agree: “The economic climate offers opportunities. We think that clients will want to see more offerings and more innovative products from their suppliers. They are also looking for consolidation to reduce the number of suppliers they deal with.

“Our objective is to bring more assets to them. This can either be done organically or through acquisitions. We have more than a year’s worth of turnover on the balance sheet, plus institutional investors who are encouraging us to do deals – they have said ‘do something with the cash, or give it back’ [buy back shares].”

In the first six months of 2008, Brady announced pre-tax profit of £218,000 on revenues of £2.5 million, a 51 per cent increase on profits on the same period in 2007. The company plans to grow revenues by 25 per cent this year.

Secondary fundraising
The purchase of Comsoft has barely dinted the company’s balance sheet and Lavelle is satisfied with the AIM listing. “Our listing has provided very efficient access to capital and provides a strong foundation for our continued high level of growth. There are funds available on AIM for people with the right strategy and the right story. I think it is a fantastic place to be if you are a small software company.”

He suggests that the press has been overly negative about the small-cap market and its lack of liquidity, and views the stock market as an opportunity for growth. “I think there’s money around, but people are being more selective about the deals they will go after,” he says.

The dynamic CEO has ambitious expansion plans. He joined the company in September 2007 to introduce a global sales strategy aimed at boosting revenues. Initially, he admits, his plans faced a certain amount of scepticism from within the organisation. However, he proceeded to recruit sales staff and flesh out his growth plans.

“There is a point of inflexion for a smaller software company intent on international growth. Investing overseas is risky and expensive if done badly, but is essential to grow the business. We had a fantastic product that we wanted to sell around the world, but didn’t have a sales team.”

Last year, following the new regime, the company tripled the number of major contract wins to nine. Lavelle adds that the network will also give greater distribution to Comsoft’s products and enable it to expand into the North American and European markets, where Brady already has a presence. “They can fast-track their expansion and lessen the risk by working with a partner,” he comments.

As the dust settles on the Comsoft deal, Lavelle is ready for his next acquisition, and Brady’s coffers are far from empty. “We have an active M&A campaign and we anticipate that we will close more deals this year, funded through either cash or paper, if we need to. We have the flexibility to do either – which is a good place to be.”