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At Metastorm, Plan B is working out just fine Print E-mail
Wednesday, 22 July 2009
By Matthew Quinn
Christopher Desautelle knows a thing or two about improvising. 
Back in November, Desautelle, CFO of business software maker Metastorm, found himself boxed in. Six months earlier—in May 2008— Metastorm's management had filed to take the company public. The filing came after hundreds of hours of hard work and preparation. Little did Metastorm's senior executives know that the IPO market was about to completely shut down.
“It was impeccable timing,” Desautelle told CFOZone.
The Baltimore, Md.-based company, which specializes in business process management (BPM), was aiming to raise between $70 million and $80 million in capital. The cash—along with the stock issued in the IPO—would support Metastorm's M&A strategy. In the BPM market, acquisitions are often crucial to staying competitive with larger players. 
But the downturn in the stock market kept Metastorm from going public. What's more, the IPO filing itself prevented the company from doing deals of any size.  As Desautelle pointed out, a large acquisition would require auditing the target and refiling the S-1 with the SEC. And Metastorm had already spent about $2 million in preparing for the IPO.
Thus, an acquisition would have to be put on the back-burner. That can be a risk strategy in the BPM sector. The largest vendors control around 80% of the market, which is extremely fragmented. Metastorm will do about $90 million in revenue this year and has a 4% market share. That tiny slice is still enough to get the company onto the list of Top 10 BPM vendors. Higher up in the ranks you find heavyweights like Oracle, IBM and SAP.
Because of such dynamics “there is no way any one of the vendors in the BPM space could become one of the Top 3 vendors without having a strategic [acquisition] component to their business plan,” said Desautelle. 
Metastorm had been following its own M&A plan, a growth strategy which was crafted at the end of 2004. The next year, the company bought CommerceQuest the year after. That deal was followed by three acquisitions in 2007, including Proforma, Metastorm's biggest purchase to date.
But as Desautelle discovered, being an acquisitive private company has its shortcomings.
“If you think about trying to do an M&A deal as a private company, you’re trying to convince the target to take some of your stock,” explained Desautelle. “If they want cash and it’s something more than what you have on the balance sheet, you have to raise it. You have multiple activities going on in parallel.”
And so, in February 2008, Metastorm started the IPO process to eliminate some of those activities.
By November, however, Metastorm was still in limbo and its management had two choices. It could keep the filing and hope to get out to market soon. Barring that, the company could pull the IPO and refocus on the acquisition part of its strategy. That route would involve finding capital elsewhere—if needed—and going public as a bigger, stronger company in a couple of years.
The company’s executives opted for the latter, accelerating its M&A strategy. Desautelle said Metastorm is currently in deep discussions with three targets.
He noted that he sees the deal landscape changing recently as the economy continues to struggle to bounce back, at least among founder- and venture capitalist-backed companies.
“When we picked up the M&A in earnest back in November, the arbitrage between what the markets said companies were worth and what founders and VCs thought their businesses were worth was huge,” according to Desautelle.
The gap has closed considerably since then. 
Desautelle said there are three buckets of companies in the BPM market outside the biggest players. Those include the founder-backed company. That kind of company faces questions about how it will grow and whether it has the ability to raise capital. 
Then there is the VC-backed company that’s doing fairly well. Typically, investors in those businesses are willing to wait for valuations to rebound before cashing out on their investments.
Finally, there’s the VC-backed business that’s cash-flow break even—or worse. Generally, these companies could use more capital. But in many cases, their investors have has lost their appetite for such risk.
The last group “are without a doubt becoming much more aggressive in coming to us about a combination,” Desautelle said. “In fact, they’re willing to talk about taking some Metastorm private stock.”
Desautelle, whose resume includes stints as CFO (at XDB Systems) and controller (for Passport Corp), as well as research analyst and investment banker, said Metastorm's management is interested a fair number of BPM software sectors. Those include GRC (governance, risk and compliance), business intelligence, data mining, data analysis and business activity monitoring. The company is also looking at vendors with expertise in areas outside of Metastorm's verticals (financial services, pharmaceuticals, health care, government and business services).
With its acquisition strategy, as well as organic growth, Metastorm is targeting 15% to 20% annual growth and revenues of $200 million by 2012. Of course, its sales staff is battling an economy where sales cycles have been extended for existing customers and new ones are reluctant to make new capital investments.
“A lot of investment decisions at big companies are based on capital availability, predominantly debt,” Desautelle said. “Once companies are able to access debt markets again, capital investment should follow.”
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