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Acquisition trail: Advanced Computer Software plc

01 May 2009

When Advanced Computer Software plc emerged onto London’s AIM market in September last year it was clear that its fiery blend of impressive products, fully loaded management and deep pocketed investors could cause a stir.

Having started life following the reverse takeover by Drury Lane Capital of healthcare software specialist Adastra Ltd, ACS has spent the last six months kicking its newly acquired operating division into shape – with striking results.

Under the stewardship of all-female top-team, chief executive Vin Murria and finance director Karen Bach, ACS is on an unfettered drive to grow its core offering and bolt on businesses where it can.

Murria’s expertise in this respect is notable. She was behind ACS’s predecessor company Computer Software Group plc, which after a string of acquisitions was sold two years ago to private equity firm Hellman & Friedman for US$1bn.

The team is heavily influenced by investment specialists Elderstreet and Marwyn. Marria is a partner at Elderstreet and Michael Jackson, the firm’s founder and chairman, holds the chairmanship of ACS. Marwyn co-founder and managing partner Mark Watts is posted as non-executive director, and his firm holds a 21.5% stake in the company.

According to Bach – who was CFO at IXEurope when it was sold to Equinix Inc for £265m two years ago – ACS is looking to deliver a blend of organic and acquisitive growth.

ACS’s original move for Adastra was partly driven by the private company’s strong grip on its core healthcare markets. Adastra specialises in developing software for the out-of-hours, or unscheduled, care sector where the flow of information between NHS call-desks and patient GPs is all-important – but traditionally less than efficient.

“What is interesting is that the business has got a great product – it controls 95% of its original market and it has been growing into other markets as well,” Bach says, “and yet it just wasn’t run with a commercial mind.”

Nevertheless, she says the first six months have turned out to be hugely successful. “We did the acquisition and during the integration we changed quite a lot of things operationally within the company,” she says.

Those changes involved a shake-up of the sales methodology and a stripping out of unnecessary costs. Going forward, Bach insists that it now has major scope for organic growth.

“Looking at the core business and its core software product, you can take it from the traditional out-of-hours service and adapt it for walk-in centres and polyclinics.

“We now run 50% of the walk-in centre market. Polyclinics are a new initiative within the NHS but very similar, so we’re building into that as well.”

Elsewhere, Adastra is developing a string of new systems to help Primary Care Trusts (PCTs) achieve cost savings in the face of increasing pressure to introduce IT systems in order to drive efficiencies.

Those products include iNurse, a mobile PDA system that tracks the movements and work schedules of community care workers like district nurses. Here, the company has been piloting the device with Derby PCT, which, Bach says, has enjoyed “huge returns” on its investment.

Elsewhere, Adastra is also involved in NHS initiatives such as End of Life and Summary Care Records, where adaptations of its software are proving of interest to prospective PCT clients.

“Moving forward, all of these things are great opportunities – but there are no guarantees over timing,” Bach says. “But this is more about a consolidation play as well, so on top of that organic growth we have possibilities for acquisitions.”

In a sector bustling with small companies, Bach says ACS has identified around 100 businesses that could be of interest. She notes that while a lot of them might be tiny – well under £1m revenue – they offer the chance to quickly introduce new products rather than spend time developing them.

“That acquisitive growth focuses on taking a product that fits with what we have already got and bringing in cross-selling opportunities,” she says. “So it would be companies that are already in healthcare or have already got PCTs as customers.”

Likewise, ACS is also looking at companies that have developed IT services that could help Adastra support its clients, such as business intelligence, hosting and training.

In April’s Government Budget, Chancellor Alistair Darling confirmed that PCTs would keep their budge allocations for the next two years – a guaranteed 5.5% increase. However, in two tax years time those same PCTs will have to find £2.6bn worth of savings, representing around 2-3% of their budgets – and that’s good news for Adastra.

“The areas they are identifying for those efficiencies include areas like community care,” Bach says. “So if we can introduce a product that delivers fantastic ROIs, that’s a huge opportunity for us.”

In terms of timing, like everything connected to the NHS, Bach says it is hard to predict when the acquisitions might start coming. “We have been talking to lots of people – but it has got to be the right product at the right price and we like recurring revenues,” she says.

“We’ve got £14.7m in the bank and recurring revenues of 65%. If you focus on the six months from September 1, 2008, Adastra did £7.3m in revenues with gross margins of 83%. It is a pretty good place to be in an economic downturn.

“So we’ve done a very successful first integration and now we’re looking to do the organic and acquisitive growth.”

Ben Hobson, SmallCapNews.co.uk