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Group 4: Jensen Angelloz, Daniel Hafeez & Rushi Mukkamala
Citect Corporation Case Write-Up (Group 4 – Schneider)
Summary
Citect is a middle market software company founded as a systems integration company
in 1973. They sell SCADA and MES solutions and hold ~8% of the global SCADA market. This
market share paired with targeted revenue growth opportunities makes Citect a great target for
Private Equity and public firms searching for an acquisition. Enter Thoma Bravo (Private Equity)
and Schneider Electric (potential acquirer).
These two firms entered into a bidding war for Citect in late 2005 and early 2006. The
events are outlined in the timeline below. Schneider (us) will be presenting Thoma Bravo’s team
with three options and their response will determine how Schneider’s acquisition of Citect will
proceed.
Methodology & Results
Schneider’s investment team completed a DCF analysis to determine Citect’s intrinsic
value. This methodology was selected to measure the true value of the company outside of the
market manipulation caused by the bidding war. This analysis is to be presented to Citect’s
board for approval.
The DCF was built with the ability to toggle multiple assumptions to develop the best
ownership structure option to offer Thoma Bravo. The key assumptions included in the model
are the tax rate, ownership percentage and ROI for both Thoma Bravo and Schneider which
determines the cost of equity, and the growth rate, Figure 1.
Group 4: Jensen Angelloz, Daniel Hafeez & Rushi Mukkamala
Assumptions
Tax
Thoma Bravo ROI
TB Ownership %
Schneider ROI
Schneider Ownership %
Cost of Equity
Growth Rate for TV
32%
20%
45%
15%
55%
17.250%
6.0%
Figure 1. Assumptions that can be toggled to adjust the DCF Analysis.
The DCF model pictured in Figure 2, was created using the assumptions in Figure 1. A
sensitivity analysis was run to understand the importance of the JV structure in the intrinsic
value of Citect, Figure 3. The analysis shows that any increase in the cost of equity and a
reduction of the growth rate will lower the value of Citect making the standing offer too much.
A 6% growth rate was used as the terminal rate since the final two years of the forecast had
shown a flattening of growth. The cost of equity was derived as a weighted average between
Thoma Bravo and Schneider and assumed returns. A 45/55 ownership split between Thoma
Bravo/Schneider appeared to be the correct mix with the expected ROI’s listed in Figure 1.
Year
Revenue $
COGS $
Operating Expenses
EBITDA $
D&A
EBIT $
NOPLAT $
Add Depreciation
2005
2006
2007
2008
2009
2010
2011
2012
0
1
2
3
4
5
6
7
68.3 $ 72.9 $ 79.8 $ 87.3 $ 93.7 $ 100.7 $ 105.2 $ 109.4
23.0 $ 24.7 $ 26.3 $ 28.1 $ 29.6 $ 31.4 $ 32.5 $ 33.6
37.9
33.7
36.7
39.5
41.5
45.2
47.2
48.9
7.40 $ 14.50 $ 16.80 $ 19.70 $ 22.60 $ 24.10 $ 25.50 $ 26.90
1.9 $ 1.70 $ 1.90 $ 2.10 $ 2.20 $ 2.20 $ 2.30 $ 2.40
5.50 $ 12.80 $ 14.90 $ 17.60 $ 20.40 $ 21.90 $ 23.20 $ 24.50
3.74 $ 8.70 $ 10.13 $ 11.97 $ 13.87 $ 14.89 $ 15.78 $ 16.66
$ 1.70 $ 1.90 $ 2.10 $ 2.20 $ 2.20 $ 2.30 $ 2.40
Subtract CAPEX
Subtract Inc in NWC
UFCF
TV
PV
$ 10.40 $ 12.03 $ 14.07 $ 16.07 $ 17.09 $ 18.08 $ 19.06
$ 179.59
$ 8.87 $ 8.75 $ 8.73 $ 8.50 $ 7.71 $ 6.96 $ 65.21
Value $ 114.73
Figure 2 DCF analysis model to determine Citect’s intrinsic value.
Group 4: Jensen Angelloz, Daniel Hafeez & Rushi Mukkamala
Cost of Equity
Growth Rate
14.25%
15.25%
16.25%
17.25%
18.25%
19.25% 20.25%
4.50% $ 142.00 $ 128.17 $ 116.71 $ 107.06 $ 98.84 $ 91.74 $ 85.55
5.00% $ 146.75 $ 131.86 $ 119.63 $ 109.41 $ 100.75 $ 93.31 $ 86.86
5.50% $ 152.04 $ 135.93 $ 122.82 $ 111.96 $ 102.81 $ 95.00 $ 88.26
6.00% $ 157.98 $ 140.43 $ 126.33 $ 114.73 $ 105.04 $ 96.82 $ 89.76
6.50% $ 164.68 $ 145.46 $ 130.19 $ 117.77 $ 107.47 $ 98.79 $ 91.37
7.00% $ 172.31 $ 151.09 $ 134.47 $ 121.10 $ 110.10 $ 100.91 $ 93.10
7.50% $ 181.06 $ 157.45 $ 139.24 $ 124.77 $ 112.98 $ 103.21 $ 94.97
Figure 3 Sensitivity analysis of the growth rate and cost of equity on the DCF valuation of Citect.
Narrative
Through the due diligence process Schneider undertook to develop the original offer via a
scheme of arrangement, we fully understand the value of Citect and why strong counteroffers
have been made to complete this acquisition. We also respect the passion Thoma Bravo has for
taking Citect private and because of that, we have developed three options to complete a
successful acquisition. With Thoma Bravo acquiring 15% of Citect’s shares, albeit illegally, an
opportunity to create a joint venture (JV) has presented itself, option 1. A partnership between
Thoma Bravo and Schneider benefit’s all parties, including Citect.
The benefits for Thoma Bravo include not being wrapped up in a lawsuit, partial
ownership in Citect with the original exit plan, no need to worry about engineering a financial
solution to close the deal and positive optics for the Thoma Cressey Fund VIII, L.P. Citect
shareholders benefit with the standing offer of $2.20/share being a premium of 227% over the
30-day average share price before the original offer was announced. Through the JV, Citect
would be a subsidiary of Schneider and benefit from our stable financial structure to increase
ROE, EBITDA/Net Debt and other ROI metrics. Schneider will benefit from this proposed
partnership by not purchasing Citect for the full $117.33mm of the current offer and by assisting
in Citect’s growth.
The JV split will be 55/45 Schneider/Thoma Bravo for a purchase price of $114,875,700
less the $16mm Thoma Bravo used to purchase the 15% stock position for a remaining expense
of $98.1875mm. The remaining shares will be purchased at $2.20/share. Thoma Bravo will
acquire 15.825mm shares for $34.814mm while Schneider takes 29.19mm shares for $64.1mm.
Group 4: Jensen Angelloz, Daniel Hafeez & Rushi Mukkamala
Option 2: Schneider revises the most recent offer of $2.20/share to $2.00/share and
Thoma Bravo rescinds their offer, agrees to sell all shares, votes for the merger and walks away
with nothing but the time invested. Options 1 and 2 expire an hour before the shareholder vote.
Option 3: Schneider is prepared to undertake is to keep Thoma Bravo wrapped up in
litigation for purchasing 15% of Citect’s outstanding shares to block a merger vote, breaking
Australian takeover law. The optics of this litigation will most likely hamper raising capital for the
Thoma Cressey Fund VIII. In conjunction with the ongoing litigation, Schneider will pursue a
hostile takeover by announcing a revised offer of $1.70/share and include a limited time special
dividend of $0.50/share. This move is allowable in Australia because only the original bid was
structured by a scheme of arrangement and the data provided through the data room was
equivalent to publicly available data. Thoma Bravo would be left off the target shareholder list
and therefore would not be eligible for the $0.50/share special dividend. To exit their 15%
shares, they would incur a $1.6mm loss on top of the continued litigation. Further paperwork
will be filed naming Thoma Bravo & Rick Webb as accomplices in “frustrating action,” detailed in
the Takeovers Panel Guidance Note 12 and non-compliance with the ASX Listing Rules.
A poison pill clause will also be drafted to be included in the shareholder rights plan of
the new subsidiary which will be triggered at 15.1% ownership.
Key Takeaways and Conclusions
The assumptions within the DCF analysis can be tweaked to show that Schneider is
under-, over- or bidding perfectly for Citect with a Thoma Bravo partnered JV or without. Another tool
Schneider can use is adding debt to Citect to financially engineer stronger metrics to sell the acquisition
to both Schneider and Citect’s board members. Since Schneider wants to complete this acquisition
through a pure stock transaction debt was not use to enhance return on equity or investment. If actual
returns fall below the estimates used in the DCF analysis, after the transaction, Schneider is prepared to
layer on debt targeting ~2-2.5 EBITDA/Net Debt. This will enhance ROI’s and free cash flow through tax
shields and increasing return on equity by shrinking the equity/enterprise value ratio.
Ultimately, the FOMO factor (fear of missing out) and Thoma Bravo’s emotional
attachment to Citect suggest they will take option 1 and partner with Schneider due to the
compressed offer timeline. Option 2, the hostile takeover, is too great a risk to chance calling
Group 4: Jensen Angelloz, Daniel Hafeez & Rushi Mukkamala
Schneider’s bluff with only a day before the shareholder vote and option 3 would achieve
nothing for the current fund and could hinder capital investment in the new fund. The
psychology behind structuring options 1 and 3 to expire one hour before the shareholder vote is
to invoke the FOMO factor similar to a car salesman or spam/phishing emails use of urgency.
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