Corporate Finance - Comment évaluer une entreprise - Rapport sur la valeur douce (document en anglais)

CNAM

CONSERVATOIRE NATIONAL DES ARTS ET METIERS

INTERNATIONAL INSTITUTE OF MANAGEMENT

CORPORATE FINANCE -

SOFTVALUE CASE REPORT.

JUNE 30 TH 2011.

TABLE OF CONTENT

INTRODUCTION

PART 1 – FINANCIAL ANALYSIS

PART 2 – 5 YEAR BUSINESS PLAN

PART 3 – VALUATION METHODS

CONCLUSION & RECOMMENDED VALUE

INTRODUCTION

1. Context - SoftValue & its environment

SoftValue is a recently created IT consulting company (2000) whose areas of expertise are, in terms of business processes: Supply Chain Management and Retail, in terms of IT software: SAP (Enterprise Resource Planning package), in particular, those modules related to SCM and Retail.

It is yet a small to medium company (around 50 staff) based in France with a subsidiary in Canada.

Strategic issues:

• SoftValue seems to be too much dependent on consulting projects, hence the volatility of the operating revenues…

• Industry shows that there is potential for growth but SoftValue lacks critical size for expanding its business (apparently not a cash problem), hence the talks with Gateaway, to look at the opportunity of merging complementary businesses.

This may explain why SoftValue keeps a substantial amount of liquidity available for short/medium term opportunities (e.g. portfolio activity to acquire hosting activities).

Industry background practices and trends:

• Industry shows low level of Assets in the Balance sheet as the main ‘asset’ in consulting services is the ‘expertise/know-how/skills’ of the staff.

• Overall, constant/steady growth (5%) over last decade.

• High skilled industry (permanent need to develop/maintain high level of expertise), highly competitive industry (globalized industry with competitors in low cost countries such as India).

• Human resources represent the main share of the cost, in particular for consulting activities (to a lower extent in application hosting and license reselling).

• High skilled/expensive staff in a highly volatile offer/demand job market.

• Activity is highly correlated with the overall state of the economy (in particular consulting projects).

o Companies tend to balance short/medium term “consulting” projects with medium/long term ‘maintenance/support” contracts.

o Companies use subcontractors to preserve flexibility and adapt resource requirements to the activity.

• Players in the same area in the European market:

o Logica,

o Stéria

o Cap Gemini

o ITelligence,

o Micropole Univers…

2. Our hypothesis for starting point.

In this exercise, we are supposed to be part of SoftValue and, as such, are supposed to have the answer to basic questions regarding the activity/environment of SoftValue. When this information was not available in the materials that we have, we endeavored to best guess what could be the answer:

• 3 offices rented in Paris, Lyon and Montreal.

• Office in Canada opened in 2005 generated a €40K tax credit (available until 2007), if one staff has been recruited to cover export activity.

• SoftValue’s turnover being <€7.6M, SoftValue could benefit from further tax reduction i.e. part of its EBT taxed at a 15% rate

• The 3 associates that created SoftValue are also employees of SoftValue (no dividend served to them): In total 53 staff in 2008.

• 2 to 3% ‘base’ salary increase per year, other variations of “Personnel wages” are mainly due to staff movements (e.g. recruitment).

• An important part of “Other operating costs” is the cost of subcontractors.

• Customer credit / AR: it looks like generous credit terms are part of the customer value proposition.

• “Cost of purchased goods” is mainly the cost of the purchase of licenses (e.g. VAR SAP licenses in 2008). Resale margin for these licenses estimated at 30%.

• >95% of SoftValue’s activity is “Consulting” (at least up to 2008). “Licenses” activity remains marginal (<5%).

• Low level of financial investment shows that SoftValue wants to keep his mountain of cash for short to medium term use.

PART 1 – FINANCIAL ANALYSIS

1. Income statement analysis

1.1. Operating Revenue Analysis

SoftValue operates in an overall growing industry (5-8%)* shock in 2007 (€ -750k) not linked with industry trend, maybe the loss of a contract. In 4 years, the revenues are quite stable with a variation of -4%.

* according to SYNTEC informatique

1.2. Operating Cost Analysis

Total operating costs rose by € 630k due to labour costs.

SoftValue sells IT solution, so its main cost is human labour representing more than half of the revenues, up to 80%. Overall, the labour cost has been increased by 32% due to some recruitment (+ 8 people).

On the other hand, cost reduction

...