Case Study

Strategic M&A for Holdco Growth

Introduction and Background

The engagement was with a client who was a well-known entrepreneur in the early days of the Internet. After joining Oracle following college in the 1980s, he, along with his brother and sister, started one of the largest BPO/KPO businesses in the 1990s, employing 4,500 people in Asia and 500 outside Asia. They sold the business to a strategic listed entity and, in 2009, launched a unique business focused on startups. This Holdco built software for startups in exchange for 50% cash and 50% equity.

Holdco and Its Need to Scale!

By the end of 2019, Holdco had equity in over 150 companies and was scaling rapidly. The role was to develop an M&A strategy. Over 1,000 companies across North America (mostly the US and Canada) and Asia (primarily India, Sri Lanka, Bangladesh, and Vietnam) were reviewed. It was concluded that Holdco needed to cross-sell digital marketing and fractional CFO services to its startups to build a cross-selling strategy. Multiple companies in digital marketing, finance, and accounting services were consulted to understand valuation metrics.

How Transacta Identified a Strategic Fit for Holdco?

During this process, a finance and accounting business was identified that had been started within a venture studio to support its portfolio companies with financial organization and capital raising. It was an excellent fit for Holdco. The business generated $350K in adjusted EBITDA, and it was acquired for $1M in cash and an additional $1M in earn-outs and Holdco equity.

Key considerations during the acquisition:

Leadership: Could the target CEO scale the business and commit to running it for 3-5 years? (Yes)

Strategic Fit: The target had 27 US-based employees. Could this team be complemented with Indian CPAs, given their salaries were 1/5 of US CPAs? (Yes)

Growth Potential: Did the target have a solid pipeline, and could Holdco’s startups refer business to scale the target? (Yes)

Incentives: How should the target’s CEO and management be rewarded? Options included Holdco equity, annual bonuses, and other perks.

Recession Resilience: Was the business recession-proof? What were the potential downsides?

And More Wins For Holdco

After internal and board approvals, the acquisition was finalized in December 2020. Despite the pandemic, most discussions occurred via Zoom, with key decisions made remotely. Over the next 2 years, Holdco scaled the target’s EBITDA by 3x. This attracted offers from private equity firms, including a growth-stage Private Equity firm that saw the target as a potential anchor for building a finance and accounting business. Holdco sold a majority stake to this firm at a company valuation of $18M, achieving a MOIC (Multiple of Invested Capital) of nearly 18x.

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