Advent Software Shareholder Iron Compass Comments on Proposed Sale to SS&C

DARIEN, Conn., Feb. 9, 2015 /PRNewswire/ -- The following is an open letter to shareholders of Advent Software from Iron Compass LLC:

Dear Fellow Shareholders,

Funds managed by Iron Compass LLC are currently shareholders of Advent Software.  We believe the recently announced agreement to sell the company to SS&C for $44.25 per share is not in the best interests of shareholders who are seeking to maximize value over the long term.  We have a high degree of confidence in management and the business, and we would rather be patient and earn multiples of our money over time instead of cashing out now.  Relative to the proposed deal price, we believe that standalone Advent can compound equity value at rates in excess of 20% per year for many years to come.  This rate of return is particularly attractive considering the stability and predictability of the company's cash flow.  We plan to vote against the transaction, although we acknowledge our holdings are too small to materially impact the outcome.  We write this letter to remind our fellow shareholders what they might be giving up as they evaluate their choice on the upcoming ballot.

I.  Wide competitive moat and healthy end markets make this company a rare and valuable asset.

Advent's products, particularly its portfolio management software, are deeply embedded in customers' businesses.  These systems are mission critical and it is extremely difficult for customers to change, as reflected in Advent's published renewal rates.  In our due diligence work, we interviewed many customers who described the intensely undesirable prospect of making such a change.  We knew that we had found a gem when we heard comments like the following:

'Once you get an accounting system, you aren't changing it.  Changing accounting systems feels like a hot poker in the eye.'
'If Advent increased the price of Geneva by three times, I don't know what I'd do.'

We have encountered few businesses across the many industries we cover that enjoy such sticky customer relationships.  Fewer still are those businesses that can concurrently produce robust free cash flow and growth.  Advent is led by a talented management team that has struck a balance between investing in product, sales, and marketing in a way that has driven significant revenue growth over the years while also generating tremendous operating leverage and margin expansion.  The result is a unique, highly recurring and growing cash flow stream for shareholders.

II.  Temporary factors depressed 2014 operating performance, making this the wrong time to sell.

Advent's share price fell 12% in 2014 while the Nasdaq Composite gained 13%, an underperformance of 25%.  While we attribute this to Advent's slowing revenue growth, this slowdown was due to well identified, temporary factors likely to reverse in the coming years.  Specifically, in 2014, customers delayed the purchase or upgrade of software until the new Advent Direct product suite was launched late in the year.  2014's revenue growth of 4% is lower than the 6% organic growth generated in 2009 at the nadir of the financial crisis and lower than the 8% organic annual growth from 2010 – 2013; indeed, it is the lowest Advent has seen in a decade.  The financial drag from Advent Direct was further exacerbated because the company had to bear the product development, sales, and marketing costs in advance of new revenue.

We support management's decision to invest in Advent Direct despite the near term performance impact, we believe the product has great potential, and we have confidence in their ability to launch it successfully.  Like you, we have held the stock through this period of investment, and naturally, we now want to reap the benefits.  We agree with management's assessment that the company can achieve long term revenue growth at an 8-11% rate.  Furthermore, this team has proven its cost discipline and ability to drive operating leverage over a long duration.  EBITDA margins (adjusted for customary non-cash items) have more than doubled since 2006 and have expanded by 700 basis points in just the last two years.  Accordingly, we expect that the re-acceleration in revenue growth will lead to mid or high teens EBITDA growth.

III. Through operating prowess and aggressive capital management, Advent can generate 20% rates of return to equityholders.

Advent has a history of prudent, shareholder-friendly capital management that can be continued and optimized.  The company's 2013 levered dividend recapitalization returned substantial capital to shareholders and improved go-forward equity returns.  In our assessment, because of the underlying stability of Advent's business, the use of leverage did not meaningfully increase the equity's risk profile.  SS&C plans to lever the combined business in excess of 5x EBITDA to complete this acquisition.  Leveraged buyout firms routinely borrow 6x EBITDA or more to recapitalize similarly cash-generative software businesses.  Standalone Advent could comfortably handle 5x EBITDA, which lenders would fight to provide in a low-cost, covenant-light structure.  Completing another dividend recapitalization would enable the company to pay a special dividend of $9/share immediately.  If Advent is valued at the proposed deal price, we estimate that the business would generate a 5% current free cash flow yield that can grow well over 20% per year.

IV.  Advent is worth much more than $44.25 to SS&C.  They can – and should – pay a much higher price.

SS&C has long desired to purchase Advent, as is readily apparent to most industry followers and participants.  As one analyst put it more colorfully on the call announcing the deal, "Congratulations, Bill, on bagging your white whale."  We have great respect for SS&C's management and their long track record of creating value from acquisitions, both by purchasing assets attractively and optimizing operations.  They are also savvy and opportunistic negotiators.  Can it be a coincidence that SS&C approached Advent about a deal only weeks after TPG sold its remaining stock in the company?  SS&C must have expected that TPG, an experienced seller of businesses, would have become involved in any negotiation in order to maximize the sale price.

We believe that SS&C's cost synergy guidance of $45mm understates the true potential, which we estimate could approach $100mm.  Heavy customer and product overlap between the two companies should allow a material reduction in Advent's sales, marketing and product development costs, on top of administrative savings.   We estimate that Advent could contribute EBITDA margins as high as 60% after these are fully realized, bringing the effective purchase multiple close to 11x EBITDA.  Put differently, the deal price values Advent standalone at 17x our adjusted EBITDA estimates for 2015.  Other 'mature' software businesses like CDK or Blackbaud trade at similar or higher multiples.  Where is the change of control premium?  We believe that now is the wrong time to sell Advent.  However, if a transaction must occur, we believe this price disproportionately allocates the benefits of a combination to the shareholders of SS&C.  Based on the performance of SS&C's stock price since the deal announcement, we infer that many others agree.

In summary, we don't find an Advent Software every day.  As a result, it would seem unwise to part with it without kicking and screaming.  We are not soliciting a proxy from anyone with respect to the upcoming vote, and we are not participating with anyone else who might choose to do so.  This letter is solely an expression of our opinion, vote as you think best for you. 

Sincerely,

Matt Kupersmith  &  James Hegyi
Partners, Iron Compass LLC

About Iron Compass LLC
Iron Compass endeavors to be a long-term owner of 'classically great' businesses.  These are companies we believe have a distinct competitive advantage that allows them to generate high returns on invested capital, stable cash flow, and growth over the long term. The greatest businesses seek to outperform contemporaneously in both operations and capital management.

SOURCE Iron Compass LLC