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IT Solutions Provider Valuations: Insight Enterprises Buyout of PCM Inc. Provides Math

When Insight Enterprises this week confirmed plans to buy PCM Inc. for $581 million, the M&A (merger and acquisition) deal revealed new clues about IT solutions provider business valuations.

Here’s the start of the math:

  • EBITDA Valuation – based on 2018 figures: PCM Inc.’s EBITDA was $55 million for its fiscal year ended December 31, 2018. That means Insight is acquiring PCM Inc. for 10.5 times annual EBITDA.
  • Adjusted EBITDA Valuation – based on 2018 figures: PCM Inc.’s adjusted EBITDA was $60.8 million for its fiscal year ended December 31, 2018.  That means Insight acquired PCM Inc. for 9.5 times annual adjusted EBITDA.

At first glance, those valuations are alarmingly high, especially since this isn’t a pure SaaS or cloud business. Most MSPs — which tend to have heavy recurring revenue — are selling for about 4X to 8X annual EBITDA. The multiples tend to be 4X to 6X for all cash up-front deals. The higher valuation deals tend to involve pure recurring revenue, healthy EBITDA profit margins (15 percent plus) and performance-based earn outs over a year or two, according to ChannelE2E conversations with M&A participants.

Still, the Insight and PCM figures above don’t include expected “cost synergies” between the two companies. And those synergies are critically important as Insight pitches the deal to shareholders and analysts.

Related: PCM Inc. discovered Office 365 data breach one month before sale to Insight Enterprises

Insight Enterprises Acquires PCM Inc.: Expected Post-Deal EBITDA Valuation

The synergies — slang for potential office closings, job cuts and other consolidation moves — should drive up PCM Inc.’s profitability and therefore drive down the deal’s valuation multiple.

Insight Enterprises CFO Glynis Bryan

Insight Enterprises CEO Ken Lamneck

Indeed, the purchase price implies a transaction multiple of 4.5 times EBITDA, according to Insight Enterprises CEO Ken Lamneck, who disclosed the figure during a call with Wall Street analysts this week.

How does Insight Enterprises arrive to that figure? The quick math involves $70 million in cost savings coupled with PCM’s adjusted EBITDA for 2018.

During that call with analysts, Insight Enterprises CFO Glynis Bryan offered this statement on the M&A deal’s valuation and associated math:

“For the twelve months ended March 31, 2019, PCM reported approximately $2.2 billion in net sales and adjusted earnings before interest, taxes, depreciation, amortization, and one-time items of $60 million. The purchase price implies a transaction multiple of 4.5 times, calculated as the ratio of enterprise value to PCM’s last twelve months adjusted EBITDA including the $70 million in expected synergies.

Assuming a closing sometime in the second half of 2019, we expect this acquisition to be accretive to earnings in 2020, excluding approximately $25 million in transaction costs, restructuring and integration costs incurred most of which will be incurred in 2019 and excluding acquisition-related intangible amortization expense.

In addition, we expect to achieve our expected annualized run-rate synergies of approximately $70 million by the end of 2021, primarily from efficiencies related to corporate expenses, streamlining sales and service delivery operations, and the effects of combined technology systems and operations. As Ken noted, we expect to realize more than 50% of these synergies within the first twelve to eighteen months.”

IT Solutions Provider Valuations: Seller vs. Buyer Perspectives

Still, the true valuation depends on which side of the deal you represent. Sellers will likely celebrate the lofty 10.5 times valuation based on 2018 EBITDA. Buyers will likely celebrate the far more conservative 4.5 times valuation based on 2018 adjusted EBITDA plus expected cost synergies.

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1 Comment

Comment

    George Sierchio:

    Very good find, Joe. Public companies are pretty much the only buyers that announce their true “multiple” on a deal to be able to see some behind the scenes thoughts. Obviously the adjusted EBITDA for the seller here is more than 10x REVENUE of most companies in the space, so the math on the multiples that come out in the wash on the buyer and seller side will tend to be rightfully higher (although in this case the buyer multiple is lower than I would expect, so good for them).

    However, a great example of how a buyer can pay whatever multiple the seller thinks they are getting due to buyer’s internal multiple (in this case seller thinks 9.5 their adjusted EBITDA and buyer thinks 4.5 the EBITDA they are confident happens soon after the deal). They are not waiting 9 or 10 years to just get their money back on a deal nor is someone paying 6 or 7x TTM EBITDA waiting 6 or 7 years in a more typical sized deal in this space). Also proving out Cogent’s “Opportunity Delta” theory. Theory says a deal is made because there is opportunity and fit between the parties and the buyer believes forward cash flow to be greater than seller TTM with enough of a “delta” to get what they need from a transaction that will be accretive with a reasonable price tag/structure for the seller. Those financial needs, investment horizon timelines, and risk tolerances are different from buyer to buyer, which is also predicated on the size and maturity of both the buyer and seller companies as well as the other factors you pointed out at the top of the post.

    We have these reality check on “multiples” conversations with people daily. I hope many read this post as I think it proves how buyer’s think and apply multiples well, even in such a large transaction example. Thanks for getting it out there!

    George

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