To all you muppet fund managers
My bold and underlining
Oracle's $1.6b Aconex takeover says a lot about Australian tech
Oracle's $1.6 billion cash takeover of
construction software company, Aconex, has put the spotlight on the potentially huge under valuation of listed companies in Australia's nascent information technology sector.
In one fell swoop, a company with a market capitalisation of $US200 billion ($263 billion)
has forced local fund managers to go back to basics and rethink how they value companies that don't make profits or pay dividends.
This is a challenge to the mentality of a market that rewards fund managers for maximising the amount of stocks in their portfolios paying fully franked dividends.
Compare that to the United States where fund managers are rewarded for backing companies that pay little if any dividends. In the US, tech stocks like
Amazon create value by investing to grow their market share. Often profit is a secondary consideration.
In the US value is created for shareholders through the capital gains made from share price appreciation in anticipation of global domination of an industry or sector.
Oracle is an old world tech company that has survived and prospered thanks to entrepreneurial drive of its founder Larry Ellison.
It has survived the transition from being a provider of boring relational database software to a leading cloud based software company serving every aspect of managing a global enterprise from finance to logistics and human resources.
It was smart enough to branch out into financial services in a big way and secure impregnable positions inside major global banks include several of the big four banks in Australia.
When Ellison's executives came to Australia shopping for expansion opportunities they knew they could draw on about $US28 billion in cash sitting on the Oracle balance sheet. Oracle also has another $US67 billion in short term investments.
Oracle earlier this year signalled its intent in the construction software space with the acquisition in April of construction industry collaboration and payments system company, Textura Corporation, for $US698 million.
Software is one of the world's most profitable businesses because once you have developed the code the profit margins earned from every additional client are anywhere between 60 and 90 per cent.
Aconex was the ideal acquisition for a company like Oracle. Here was a company based in Sydney but operating in 70 countries. It was investing for growth and enjoying the benefits of the network effect of rolling out its software to a rapidly growing customer base in a highly fragmented industry.
Above all, the fair value of the company was not fully appreciated by investors in the Australian market. This valuation gap was encapsulated in the 46 per cent premium paid by Oracle to the last share price.
Oracle is paying $7.80 a share, which is 64 per cent premium to the three-month volume weighted average share price. Aconex was advised by Credit Suisse.
Some of the scepticism in the market toward Aconex was understandable. An acquisition it made in Europe in 2016 had not delivered the revenue growth that had been promised.
Also, the company had struggled to gradually transition from a product distribution model that delivered revenue up front to one that delivered revenue over the medium to long term.
The Aconex profit warning in January this year saw the stock plunge almost 50 per cent to $2.92 a share.
But even that significant hiccup could not detract from the core investment proposition. This was a successful global software company with a proven record of consistently lifting revenue while enhancing its product, offering to stay a step ahead of competitors.
Aconex lifted revenue from $52 million in 2013 to $161 million in 2017 but its investment for growth meant it lost about $10 million in the year to June.
When Chanticleer first wrote about Aconex in November 2000 its two founders, Leigh Jasper and Rob Phillpot, had just done a capital raising at about 10¢ a share.
They had a vision to build software that would allow all participants in a construction project to collaborate online. At that time they had their sights set on the $60 billion Australian market. Today the global construction market is $US9.5 trillion.
Seventeen years later, Jasper and Phillpot, will, thanks to Oracle, receive cash payments for their shares of about $100 million each.
Jasper and Phillpot had some very loyal backers who stuck with them through the past 17 years including Jasper's former colleagues from McKinsey & Co, most notably Adam Lewis.
Lewis has shares in Aconex worth about $22 million and share options worth about $3.2 million.
Those who invested in Aconex from the start made about 80 times their money. Those who invested in the initial public offering in 2014 would have made four times their investment
One consistent supporter of the company has been US funds management group Fidelity Investment Management. It is notable that Fidelity is the largest single institutional investor in Wisetech Global, another global software company run out of Sydney.
Fidelity's fund managers were obviously more willing than other institutional investors to get their mind around the economics of the software industry. This involves being less concerned about dividends and price earnings multiples.
It involves putting a greater emphasis on cash generation and less weight on cash payments to shareholders.
The Aconex deal prompted an immediate flow-on effect to other tech stocks with global operations.
Here are some tech companies listed on the ASX that came on to Chanticleer's radar because of their global operations: Xero, a New Zealand software company with operations in the UK and US; Wisetech, which has 7000 customers in 125 countries using its logistics software, Pushpay, another New Zealand company which provides mobile ecommerce tools; Updater, a US centric business which helps home movers organise and complete relocation tasks; Credible Labs, which is a US centric business in the consumer finance space;
and Catapult, a supplier of wearable tracking devices, software and video analytics to global professional sports teams.
Other fast-growing companies catching the attention of the market and the media are GetSwift, which offers logistics software, and Big Un, which sells digital video production services.
Jasper and Phillpot thought long and hard before listing their company on the ASX. In fact their first attempt at a listing failed.
Their IPO was the second attempt to join the ASX. They could have listed the company overseas, but in hindsight choosing the ASX was wise.
Aconex found its way into the orbit of Oracle, which was able to follow its progress through the regular Aconex disclosures to the ASX.
The Oracle takeover of Aconex is in keeping with the technology cycle in Silicon Valley where fast growing companies in need of capital succumb to the temptations of a larger entity offering cash exits for founders.
Jasper and Phillpot will remain with Aconex under Oracle's ownership. That will allow them to continue their valuable work building an ecosystem in Australia of construction technology companies.
Earlier this year, Aconex hosted the construction technology summit, which was attended by about 500 delegates. There are now about 100 start-ups in Australia focused on construction. There has been about $100 million in venture capital money invested in the sector since 2016.
Jasper and Phillpot formed a global industry council to help fast-track digitisation of the industry. It includes AECOM, Bechtel, Fluor and the Chinese-owned John Holland.
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