Allocate Software Acquires Dynamic Change Strengthening its Application Portfolio for the Healthcare Sector

06 May 2010

Allocate Software is pleased to announce that it has agreed terms to acquire Dynamic Change Limited ("Dynamic Change"), a UK-based software-as-a-service ("SaaS") provider of regulatory compliance, corporate governance, risk and performance management for the UK healthcare market, for up to £9.0 million over three years (the "Acquisition"), which includes £1.6 million of cash and receivables acquired with the business on completion.

 

Overview of Dynamic Change and the Acquisition

  • SaaS provider with over 98% of revenues from healthcare
  • Customer numbers have grown from 54 as at 31 March 2008 to 125 as at 31 March 2010
  • Approximately 70% of Dynamic Change’s total revenues of £3.2 million for the financial year ended 31 March 2010 are contractually recurring from subscriptions. These have grown by approximately 40% over the last financial year
  • Upfront consideration of £4.9 million in cash and £100,000 in shares in the Company
  • Dynamic Change is being acquired with cash balances and receivables of approximately £1.6 million, largely reflecting deferred income which arises from subscriptions paid annually in advance
  • Further contingent consideration of up to a maximum of £4.0 million payable in cash and in full if Dynamic Change achieves at least 25% compound annual growth in run-rate subscription revenues in the three year period to March 2013
  • Directors expect the acquisition to be significantly earnings enhancing in the first full financial year of ownership by Allocate

Commenting on the Acquisition, Ian Bowles, CEO of Allocate, said: "With this Acquisition we continue to broaden Allocate’s application portfolio for the healthcare sector which will now include regulatory compliance corporate governance, risk and performance management. We will also gain domain expertise in Software-as-a-Service. We believe this is an attractive opportunity to achieve additional visibility in our top-line growth and increase our recurring revenue base."

Mil Milojevic and Hugh Ashley, Founders and Managing Directors of Dynamic Change, said: "The strategic fit between Allocate and Dynamic Change is excellent for both customers and staff. Regulatory compliance and business intelligence are rapidly emerging as some of the most exciting areas of the software market for healthcare and the enlarged group is well positioned to exploit this opportunity. We look forward to contributing to Allocate’s continued strong growth."

Based in Keele, Staffordshire, Dynamic Change, founded in 2001 is a leading provider of regulatory compliance, corporate governance, risk and performance management for the UK healthcare market. Dynamic Change has developed the "Performance Accelerator" SaaS software platform that is used by its customers to monitor and manage regulatory compliance, corporate governance, business objectives, risks and controls, performance indicators and financial targets. The platform incorporates all applicable regulatory standards and obligations for Dynamic Change’s healthcare customers and such content is maintained by Dynamic Change on an ongoing basis.

"Performance Accelerator" is a multi-tenant, single platform accessed via a web browser and has been developed by Dynamic Change with standard Microsoft development tools, using Microsoft SQL Server.

Dynamic Change has 121 healthcare customers, which is highly complementary to Allocate’s own current installed base of over 230 healthcare customers. In the year to 31 March 2010 Dynamic Change generated total revenues of approximately £3.2 million, and achieved EBITDA of approximately £0.5 million.

Acquisition Rationale

The Board believes that an acquisition-led strategy is the most beneficial for the Company when entering the regulatory compliance, corporate governance, risk and performance management market for healthcare. Accordingly, the Board concluded that the acquisition of a local provider of governance, risk and corporate performance management software with an established and growing installed base in the UK healthcare market would be an appropriate market entry strategy.

The Acquisition is expected by the Directors to be significantly earnings enhancing in the first full financial year of ownership by Allocate. Furthermore, the Board believes that the SaaS nature of Dynamic Change’s business model, with high levels of recurring revenue, will provide the enlarged Allocate group with improved visibility on future revenues.

There are expected to be opportunities to generate incremental revenues from the penetration of Allocate’s customer base with Dynamic Change’s Performance Accelerator product. The Board believes that there is significant potential for growth within the UK healthcare market, through new customer wins as well as continuing to grow the number of users at existing customers. In addition, the Board believes there is the potential for Allocate to use its global reach to take the product, in due course, to certain international markets.

Consideration
The acquisition agreement provides for the purchase of the entire issued and to be issued share capital of Dynamic Change for up to £9.0 million over three years, with an initial consideration of £4.9 million in cash and £100,000 in shares of the Company. On this basis, cash balances and receivables of approximately £1.6 million will be acquired with the business, largely reflecting deferred income.

Deferred, contingent consideration of up to £4.0 million in cash is payable based on the financial performance of Dynamic Change for the 12 month periods ending 31 March 2011, 31 March 2012 and 31 March 2013 (the "Contingent Consideration"). No Contingent Consideration will be payable unless Dynamic Change achieves at least 15% compound annual growth in run-rate subscription revenues over run-rate subscription revenues as at 31 March 2010. Full payment of the Contingent Consideration will only be made if Dynamic Change achieves at least 25% compound annual growth in run-rate subscription revenues in the three year period to 31 March 2013.

£1.25 million of the Contingent Consideration is attributable to the financial performance of Dynamic Change in respect of the 12 month period to 31 March 2011 and £1.75 million is attributable to the financial performance of Dynamic Change in respect of the 12 month period to 31 March 2012. If the full payment of £1.25 million of the Contingent Consideration attributable to the performance in respect of the 12 month period to 31 March 2011 is not made it remains available to be paid in respect of the financial performance for the subsequent 12 month period to 31 March 2012 (but not thereafter). £1.0 million of the Contingent Consideration is attributable to the financial performance of Dynamic Change in respect of the 12 month period to 31 March 2013.

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