When the directors of software firm Pertmaster decided on a sale, they brought in corporate finance boutique EMC to do the grooming. Andrew Chilvers reports.

For Sarim Khan and his colleagues, selling his software business involved complex negotiations with UK and US parties, lengthy cross-border legal and due diligence work and resolving shareholder tensions over the sale.

The chief executive of Guildford-based Pertmaster knew he was sitting on a niche business that could attract suitors from the UK and US. It was still a small company with a turnover of £1.25 million in December 2005, but it had already featured on a Deloitte Fast 50 list of growing businesses to watch.

The company produces risk and analytics software for Project Portfolio Management environments, pitching to concerns as diverse as oil and gas exploration companies, manufacturers and central government. Unsurprisingly, for larger acquisitive IT firms Pertmaster was an attractive target.

Nevertheless, the team understood that if the management team was to continue building the firm’s contract base and reputation without getting waylaid by complex exit issues, an outside party had to be hired to do the job. At that point, in September 2005 they brought in Desmond High, director at corporate finance boutique EMC.

“Sarim Khan had been brought in to drive growth during the past couple of years,” High says. “The team was ambitious about growing the business and recognised that with his strong sales background, Khan could be a key player for the future of Pertmaster.

High recognised that with consolidation in the industry, Pertmaster was too good a proposition to remain independent for much longer. He briefed the team about the potential options for a sale; one strategy could be a straight exit, the other could be a partial buy-out or link up in a structured partnership with one or two other parties. As a result, Khan and High started to put discreet feelers out into the market.

High: “I was hand holding quite closely throughout that period. We were discussing possibilities, talking to third parties. I was helping them with their information memoranda and helping them with their basic financial numbers in terms of projections. I was then making direct approaches to third parties.”

Beauty parade

High and the Pertmaster team were soon approached by keen interests in the UK and US. After a lengthy bidding war, US software business Primavera was considered the ideal fit for Pertmaster. The American firm is a leader in project management portfolio software boasting $5.5 trillion of worldwide projects and programmes, and in 2006 generated revenue of some $120 million [£65 million].

The privately-owned company already had a working relationship with Pertmaster and had recently received growth funds by two US venture capitalists. But as Primavera and Pertmaster started talking seriously about doing the deal, High realised that different objectives and agendas needed careful management and planning.

The directors and shareholders of Pertmaster all agreed on a sale, but had different views about the type of exit and timing.

Like all firms that look for a sale, the critical factor is how to maximise the value for the shareholders. And particularly with a fast growth business there is the fear of selling too soon. This can sometimes be dealt with through an earnout but because of the different personal objectives, some of the team were willing to go for an earn out that might give another payday if they achieved certain targets, while others were more comfortable with a higher once and for all cash payout on completion.

High: “There was a juggling act about what was an acceptable deal structure to all parties. There was some horse trading between the shareholders and we then had the scenario that if it’s an earn out who gets it and what proportion is paid to people?”

Eventually, all parties came to an agreement brokered by High, whose independence was viewed as crucial to get the necessary shareholder approval to the deal as a whole. As these negotiations came to a successful conclusion, Primavera issued instructions that sparked further tensions to the deal.

High: “Primavera intimated during the negotiations that they saw some members of the team as more important to the future growth of the company than others, and saw the earnout payment as a reward for those individuals rather than as part of the sale proceeds for all existing shareholders. As you can imagine, this didn’t go down too well. But we eventually managed to work it in a way where each individual felt they were getting the best out of the deal, relative to their circumstances.”

“We also had some difficulties with share option schemes. They hadn’t been properly put in place and recognised that the tax treatment on share options was not as favourable. So we had to shape the deal accordingly.”

Crossing borders

As with any cross-border deal, geography and time differences play their part in making negotiations more complex. The Primavera board members knew what they wanted out of the deal. As High points out, Americans have their own methods of doing deals that are alien to deal makers in the UK, and in this case were fairly dogmatic over complex issues such as the deal jurisdiction, which if things go wrong will determine whether any resulting litigation will be heard.

To help smooth the process, EMC identified a locally-based US lawyer to help the Pertmaster team understand the US approach. With no UK subsidiary, all negotiations, legal and financial work had to be done “at arms length”. This was also true of the due diligence process “and it did make life a little tricky”, High admits.

Nevertheless, heads of terms were agreed in September 2006 and the deal was finally signed off in December. Like many cross-border acquisitions, cultural differences arose that both parties had to understand going forward. But High recalls that, unlike many international deals EMC has worked on, the Pertmaster-Primavera deal went “very smoothly”.

Above all, the deal illustrated the crucial role that an outsourced corporate finance boutique plays. Independence and integrity are essential in negotiations between the merging companies and between conflicting interests within the business itself.

High concludes: “I played the role of the honest broker. Small businesses run by directors are time consuming. So using an outside adviser can take the heat out of things. The directors are bright, they want to get involved but I had to tell them to back off at critical times, and trust me to act in their collective best interests.

“It was a case of managing them and their expectations. They had their own vested interests, so individually they would have found it harder. They all had different agendas. I was there to make everything happen for them and, I think, they trusted me to do that.”