Right up there on the list of things the City did not want Autonomy to do was make another acquisition. But that, it seems, is exactly what the FTSE 100 software company, which divides opinion in the Square Mile like few others, is planning.
From the RNS on Wednesday morning:
Autonomy Corporation plc (“Autonomy” or the “Company”) today announces that it has launched an offering of senior unsecured convertible bonds (the “Bonds”) due 2015 (the “Offering”). The aggregate principal amount of the Offering is approximately £500 million.
Rationale for the Offering and use of proceeds
The proceeds of the Offering will enhance Autonomy’s ability to engage with potential acquisition targets, and be used for possible early repayment of the Company’s outstanding bank debt taken out in connection with the Interwoven acquisition and general corporate purposes. Should no uses arise within a reasonable period of time the Directors would consider a return of capital to shareholders. Autonomy’s gross cash balance as of 31 December 2009 was $242.8 million with net cash of $45.3 million as at that date.
So let’s recap on the rationale. Raise £500m via a convertible and if we can’t find anything to buy, hand it back to shareholders. That strikes us a very odd way to fund a share buyback. (And note bank debt from the Interwoven acquisition is $197.5m, so Autonomy is definitely looking to make an acquisition and probably a big one given that its balance sheet is reasonably good shape).
Moreover, if Autonomy — which has had run-ins with analysts over some of its accounting practices — is such an inherently super-duper growth story why does it regularly make acquisitions? Is deal-making in its DNA?
For its part the company claims its major shareholders are supportive of the fund raising, which prior to any transaction will by dilutive by 6 per cent to earnings per share.
And the company says its three major acquisitions over the last five years have created “aggregate value of $1.3bn (net of cash acquired) representing c.20 per cent of current market capitalisation of Autonomy”.
Also it is telling people not to worry about the early 5.5 per cent fall in its share price:
For technical reasons we would expect the share price to fall on the announcement of the launch of the convertible bond (CB).
Of course, that is true to some extent — buyers of the convertible will look to hedge their position by shorting the underlying stock. But surely some of the weakness reflects concerns about Autonomy hitting the acquisition trial again?
Indeed, that’s the view of Merrill Lynch and Citigroup.
Merrill:
Fuel for the bear story
We see a negative share price reaction today. There is growing concerns that Autonomy is simply a roll-up story similar to Misys in the 1990s that just looks to increase earnings. We think the convertible will likely fuel this argument.
So far, we are less concerned re this argument. All of Autonomy’s recent acquisitions have added another dimension to the platform story and as long as the company does not start buying random assets we see it on the right track. Investors need to be aware that the company is operating in an increasingly consolidating market with Oracle and IBM being just as aggressive to achieve a dominating market position in content. Solely relying on organic growth would mean that Autonomy would miss the opportunity.
Citigroup:
While the convertible bond provides flexibility to repay its $198m debt, this seems to us unlikely as the company has good terms. In our view, it is more likely that the amount will be used to accelerate acquisitions, suggesting its total war chest is now around $1bn.
We think the stock may trade down following the news – had the convertible been announced before yesterday’s acquisition, it might have sent a message that smaller fill-ins would also be an option; as it is, however, we think today’s announcement could raise investor concerns about large deals. That said, we should point out that historical deals have been highly accretive and the last was also partly share-financed. We would therefore use any weakness to build positions
In case you were wondering about Tuesday’s small acquisition it was of a company called Microlink, a leading Autonomy reseller targeting US government accounts.
And this $55m deal has already drawn some criticism from analysts.
Here’s Paul Morland at Astaire:
In the absence of any strategic rationale that makes any sense to us, we can only conclude that this was the acquisition that Autonomy needed to help cover up slowing sales growth and deteriorating DSOs (Days Sales Outstanding). Even some of the bulls have said they need to see a few sets of clean numbers before they are convinced of the Autonomy growth story. We expect this acquisition to leave them feeling distinctly uncomfortable.
Ouch.
Anyway, here’s the early price action in Autonomy:
Finally, for those interested in the minutiae of the CB offering, here is what the bookrunner Morgan Stanley is sending round the market this morning:
Related links:
Memo to Mike Lynch - FT Alphaville
Autonomy and the City – FT Alphaville