Two weeks ago I reported on the proposed acquisition of Global Graphics by Congra Software and I think this is worth a more detailed look if only to see some of the thinking that goes behind acquisitions like this.
You can find the details of this proposed acquisition on the Global Graphics website here, and my original report on it here. But essentially, Congra Software is offering to buy the entire share issue of Global Graphics for €4.25 per share, a premium of nine percent which values the company at €50.30m.
Gary Fry, managing director of Global Graphics says this price was arrived at using publically available information on Global Graphics’ historic and current revenues, adding: “They made an offer based on that data.” He also says that it’s comparable to other acquisitions in the digital print sector.
Fry says that the company was not up for sale and that Congra made an unsolicited offer. This is a little disingenuous as it’s been on the cards for some years that Congra would make such an offer since the two companies are linked through Guido Van der Schueren, who is the chairman of both company’s board of directors. The two companies have worked closely together now for several years.
Van der Schueren has a background in sales and marketing for prepress vendors, including Compugraphics and DISC. He co-founded Artwork Systems in 1992, where he was managing director from 1996 to 2007, becoming vice chairman of the EskoArtwork Group from 2007 to 2011. He is the main principal of Congra Software, the holding company that owns Hybrid Software. So, clearly he has a good track record in managing companies in the graphic arts sector.
Global Graphics is best known for developing the Harlequin RIP but Fry says that Global Graphics is not just a RIP company anymore, explaining: “We do have RIPs in our portfolio. But we are supplying solutions for digital press OEMs whether they want a RIP or a complete DFE or drive electronics or screening tools so we are a solutions provider for printer OEMs in the high speed, high quality digital print sector.” He says that customers that needed a RIP might also need help elsewhere but that equally customers might already have a RIP but still need further screening tools.
This flexibility is also leading Global Graphics into the growing industrial inkjet market. Fry says that these industrial markets from wall coverings to ceramics are still graphically rich and still need colour management and PDF file handling so the basic business strategy – selling both RIP and screening tools – still holds up. Nonetheless, the industrial market represents a huge growth opportunity for Global Graphics and the success that the company has had in this area is mostly down to its screening technologies, which I’ve already covered here. This has been taken up by companies such as Ellerhold, as detailed here. In my view, Global Graphics has clearly demonstrated that it has software tools that can overcome some issues with inkjet, notably banding. Using software to tackle these issues is both faster and cheaper and as more printer vendors become aware of this so there’s every chance that Global Graphics will experience considerable growth in its business.
This possibility in turn has led some people, such as Bart Goemaere, owner and director of BeursTips, to question whether or not the price offered by Congra Software reflects the true potential of Global Graphics. BeursTips is a Belgian newsletter published in French and Dutch that buys shares in companies and then provides commentary to readers on how that company is doing. Goemaere says: “That means that we have leverage in the companies that we follow and because Global Graphics is a small company most of my readers own shares in the company.”
He says that he believes the Global Graphics shares should be priced at €8, explaining: “The reason for the €8 target was based on the finances of Global Graphics on 15 times the EBITDA.” He adds: “If you look at the business model of Global Graphics it comes mostly from the URW (fonts) and Meteor (inkjet drive electronics) business and the existing RIP business, which is growing quite nicely. But Global Graphics has been working on screening processes to recalibrate inkjet in the industrial market and they are building a new business model. This has the same business potential as the previous model with the RIP business at Global Graphics.” Goemaere argues that Global Graphics has yet to reap the benefits of its inkjet technology and so it does not show in the balance sheet but that the potential is so great that it should justify a higher price, saying that the standard in this situation is 15 times ebitda. Goemaere has already written a number of articles about this in Beurstips though you will need a subscription to read them (as well as Google Translate or similar unless you speak Dutch).
Goemaere believes, based on feedback from his readers and people he has talked to, that at least 25 percent of the shareholders will vote against this deal, though he stressed that he does not have a mandate to speak on behalf of these shareholders.
However he also asks why shouldn’t Global Graphics buy Hybrid Software using a simple share swap mechanism with the same 8x ebitda value that Congra Software is suggesting. This would make Van der Schueren one of the largest shareholders in Global Graphics without having to raise any further capital though Fry says that such a deal would be too disruptive.
Instead, the board of Global Graphics has recommended that shareholders take the offer from Congra Software with Fry saying: “We think its a good strategic fit for the companies.” He adds: “I would like to offer more to inkjet vendors and OEMs and Congra has a great deal of technology that we are licensing at the moment. So, our DFE is not our technology but it’s Hybrid’s and so Hybrid is a very important partner to us and being able to be much closer to that product development is a big opportunity for us and that’s where I see the real benefit.” He adds: “We have a greater knowledge of what OEMs are looking for in their DFE and we work more closely with Hybrid’s engineering teams to make sure those requirements are better met. So we could interface the product development much more.”
The next stage is for Global Graphics to go to Court to obtain a ruling setting out the arrangements for the shareholders to vote on, which should be made available soon. For the vote to be valid, 50 percent of the shareholders, meaning the representatives of 50 percent of the shares, have to take part and of those 75 percent have to vote in favour of the proposed acquisition. Guido Van der Schueren will not be able to take part in the vote because of an obvious conflict of interest.
There are a couple of other things to note. Firstly, Johan Volckaerts, a non-executive director of the Company, controls 17.04 percent of the company’s voting rights through his own personal shares and Clema Capital sarl. He has already said that he will accept the €4.25 offer. Also, the deal that has been proposed does not include those shares owned by Powergraph BVBA, which is jointly owned by Guido Van der Schueren and his wife, Ms. Brigitte Noël.
The other factor to consider is whether or not Global Graphics will suffer any fallout if the shareholders vote against this deal. Fry says that Global Graphics works closely with Hybrid Software and that there are contractual arrangements between the two companies with both cross-licensing technologies from each other.
Usually I would expect that anyone proposing a deal like this would have canvassed the opinions of enough shareholders to be certain of success but this acquisition seems much more finely balanced. Personally, I believe that users – the people that read this website and that buy and use the printing equipment – are better served when the major players in the industry are publically listed and therefore subject to regulation and a degree of transparency. And I definitely see Global Graphics as a major player in the graphic arts, both for the work it’s done historically in developing the Harlequin RIP and for its current focus on inkjet printing. Then again, I don’t own shares in any of these companies, so what do I know?