It was the largest acquisition Hyland Software Inc. has ever made — by far, says President and CEO Bill Priemer. The deal to buy Perceptive Software and bring a key competitor under the same roof after more than two decades of battling for business is a game changer for Hyland.

It adds more than 5,000 customers, including 1,000 in Germany, along with a regional office in Berlin. And it boosts Hyland’s 12-month revenue forecast by more than 40 percent.

“We didn't just become a bigger company, we became a better company,” Priemer says. “The acquisition has strengthened our product portfolio, expanded our market presence and brought us some very experienced and talented new colleagues.”

The deal adds more than 700 employees to Hyland’s workforce, which now tops 3,000 employees worldwide. Add in the revenue boost, and it’s yet another shot in the arm to the region’s economy from a company that has quietly become one of the preeminent software companies in the world.

Here’s an inside look at how the deal got done.

The backstory

Hyland executives had long kept an eye on Perceptive Software. When printer giant Lexmark paid $280 million for the company in 2010 as the centerpiece of a new business strategy, Hyland took notice. Lexmark went on to outbid Hyland for ReadSoft and then bought Kofax, another Hyland competitor. But Lexmark’s strategy quickly stalled and it was acquired by a Chinese consortium led by Apex Technology Co., a maker of ink cartridges that wanted Lexmark’s huge printer business.

That presented a new opening for Hyland – but Apex and its consortium of investors were looking for a single buyer for all three of its enterprise content management-related businesses.

Eager to get his hands on Perceptive, Priemer turned to Thoma Bravo, the private equity investment firm that acquired a majority stake in Hyland in 2007. Together, they devised a way for Hyland to finally buy its rival.

Craft the pitch

This was precisely the type of deal both parties had in mind when Thoma Bravo acquired Hyland. It was an acquisition that would help the company expand both its customer base and its product offerings. The only catch was Priemer did not want to purchase Lexmark’s entire enterprise content management business.

Fortunately, Thoma Bravo had a solution. A plan was devised to purchase the entire business, retain ownership of ReadSoft and Kofax, and then sell Perceptive to Hyland. The deal would enhance Hyland’s position as a dominant force in the software industry by answering two key questions.

“Do they have technology that can make our solution more compelling or can serve as a cross-sell opportunity to our existing customer base?” Priemer explains. “Do they cater to or serve a customer segment that we think is an attractive segment that has growth potential?”

Perceptive had the ability to do both. The next step was to close the deal.

Develop a strategy

With the seller pushing to get a deal done quickly, Thoma Bravo and Hyland had to move swiftly to secure this deal.

However, there was a lot to do in a condensed timeframe to finalize the transaction. Perceptive was part of Lexmark and several smaller assets were part of Perceptive. So financial statements, growth rates and customer retention statistics had to be created from scratch to assess the assets being bought and then determine a purchase price that fit the strategic value of the business.

“The price we come up with may be different from the most somebody else is willing to pay,” Priemer says. “In some cases, it can be more. If we can identify more cross-selling and revenue-enhancement opportunities and more opportunities to create synergies, it could be worth more to us than any other buyer.”

Priemer also studied the effect the purchase might have on Hyland’s compound annual growth rate, as well as its profit margin and EBITDA margin.

“Our compound annual growth rate organically over the last 10 years has been between 14 and 15 percent,” he says. “When you layer on the acquisitions, our compound annual growth rate is 17 percent. We want an acquisition to be able to sustain or potentially accelerate that growth rate, not detract from it. We’re also above 30 percent EBITDA margins. That’s appropriate for a software company of our size and you can still drive the growth we’re driving while making those kinds of margins. But not all software companies do. A lot of them don’t. We have to look at that and see where we’re at.”

Work through the complexity

Another factor Hyland had to address was a complex ownership structure in which different Lexmark units and assets had been domiciled.

'“For us to add them to have the most favorable tax treatment, it meant transitioning some of this ownership,” Priemer says. “We had to be very careful and specific about how we de-merged these entities from Lexmark and then from each other.”

Ownership of the assets was based in multiple countries. Nearly 200 European-based employees had to be accounted for as Perceptive employees were transitioned to Hyland. Sorting out who stays and who goes is a critical part of the process as it can set the tone – positive or negative – for the relationship between the buyer and the acquired business.

“We make those decisions before the transaction closes and then on day one, on our very first day of owning the company, we communicate to any employee that we’re going to separate that they won’t be continuing with our company,” he says. “If they are going to be separated, nobody is left wondering. It’s not going to happen two months or three months later. After that day, if you’re part of Hyland, you’re part of it as much as anyone else. We can point to previous acquisitions and people who came to Hyland through those deals and demonstrate how they’ve become leaders in our organization. It’s not just acquiring the technology or the customer base. It’s acquiring the people too.”

Blaze a new path

In the midst of negotiating a deal, it can be easy to lose sight of external stakeholders, most notably the customers who will be affected by the deal.

“It can be very disorienting and potentially disruptive for a customer to potentially have to deal with new people,” Priemer says. “Or if it’s the same people, it might be a different process.” In the case of Perceptive, he says “some of their software is going to live on for a very long time as a core part of our portfolio and we’ll continue to invest in it and develop it.”

In other cases, products that are redundant won’t be the focus of long-term development — though Hyland will continue to provide technical support and compatibility releases for all products in its portfolio.

“Eventually, those customers will want to migrate from that software package to our software package,” Premier says. “Hopefully there will be enough additional functionality and value that it will be worth their while. That’s our intent. We’ll have all the utilities and services to make that migration as smooth as possible.”

Priemer is keenly aware of the responsibility that his company has in the digital age.

“Our kind of software is important for an organization,” he says. “We’re where your business records live. If you digitized the business and moved off paper, your business records — contracts, employee files, invoices and records — those are stored using our software. It’s not something you can do without. Customers are justifiably nervous if the company that is their vendor for this kind of stuff has new ownership and a product line that might go through some changes.”

Hyland produced a series of documents that addressed frequently asked questions from multiple perspectives, attempting to answer any questions that might come up after completion of the deal. It’s all part of a finely tuned M&A strategy that Hyland has developed in the decade since being acquired by Thoma Bravo. Priemer studied Perceptive over an extended period of time and got to know the business. When the opportunity arose, he was quite prepared to make a deal.

“There’s still much to do to fully integrate our businesses, onboard our new employees and customers, and unify our systems and processes,” he says. “As we're integrating personnel and learning more about each other, we're identifying areas where the other side did it better and where we can incorporate the best of our ideas, technologies and approaches.”

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