Alfresco Acquired by Thomas H Lee – Initial Thoughts

It was announced yesterday that Alfresco will be acquired by Thomas H. Lee Partners, a Private Equity Firm based out of Boston.  This post will share our initial thoughts on the acquisition from a cursory review.  Look for a longer, more detailed post sometime in the future, once more detail of the acquisition is available.

Alfresco had to be sold to somebody

When Alfresco was founded in 2005, it was initially funded by three Venture Capital firms and is currently funded with 68 million from four different firms (who would expect significantly more than just their 68 million back).  In 2013, Alfresco brought in Doug Dennerline as CEO to move the company to the next stage, which at that time was to take the company public.  For a variety of factors, including the timing of the market and the ability of software companies to go public successfully, the window for a public offering faded.  Both Doug and the venture capitalists (and all of the present and past Alfresco employees with options) were looking for a way to execute some type of exit to realize the gains on their investments.  Doug’s mission was to work on the underlying fundamentals (revenue, profit, growth) of the company to provide a means to accomplish that exit.

We started hearing that Alfresco was promoting a sale about 3 months ago from others in the industry.  Some of the possible options might have included:

• OpenText (Public Company) – Fresh off the Documentum purchase last year, it is our understanding that OpenText did consider purchasing Alfresco. Our thoughts are that this would be the bad option for customers as it would be easy to see Alfresco getting lost in the morass of other OpenText software acquisitions.
• Lexmark/Hyland/Thomas Bravo (Private Equity)– another conglomeration of ECM tools. Thomas Bravo/Hyland Software had added Kofax/Lexmark in May of 2017.  We would rate this similar to the OpenText option.  As we have mentioned here, we don’t see the ECM suite as being that much of an advantage, given opensource and the cloud.
• Public Technology Company – Outside of OpenText, other possible suitors might have included Amazon or other cloud companies looking to add Alfresco’s capabilities to their offerings.
• Private Equity – Whether it be Thomas H. Lee Partners or others, there is a lot of money available outside of the stock market looking for growth opportunities.

Of the options above, we would say that a non-ECM suitor would be our and customers’ preference, given how easy it is for a smallish firm like Alfresco to get lost in a portfolio of many competitive products.

Thomas H. Lee Partners (THL) – Initial Thoughts

With any new ownership, it is very hard to determine just how Alfresco will evolve as part of the THL portfolio.  We would expect that THL will focus on growth along with an injection of new leadership and structure.  Having achieved their exit, we would expect many at Alfresco, including Doug Dennerline (CEO), Carlton Baab (CFO) and some long-time employees to cash in and move on to what’s next.  Key to the success of the company will be their replacements and strategy for Alfresco.

We are encouraged that THL seems to be more of a “buy and hold” private equity firm rather than a “buy and flip,” so it is likely that Alfresco will be with THL for the foreseeable future.  While THL does not have a large technology portfolio, it is our understanding that they want to add one and are bringing in experienced industry professionals with Alfresco being one of the early technology investments.

From a quick review of THL’s website, the THL “framework for building value” approach with their portfolio companies include:

• Organizational Design – We strive to align the organizational structure and management incentives of a portfolio company with the strategic objectives of the business. We invest in people and resources to strengthen and expand the organization to support accelerated growth. We would anticipate this would be new management and structure for the leadership team at Alfresco.
• Operational Transformation- Operationally, we partner with portfolio company management to re-engineer key business processes to improve efficiency, quality and service levels. We establish a common set of operating metrics to measure the success of the various initiatives. We seek to instill a return on invested capital discipline which leads to better decision-making on acquisitions, capital expenditures and balance sheet management. It is hard to determine how this will affect Alfresco as Doug’s focus was always on the bottom line.
• Growth Acceleration – As growth-oriented investors, we work to accelerate growth in our portfolio companies, building upon the secular growth themes underpinning our investments. To accelerate organic growth, we have developed expertise to drive revenue through (i) pricing strategies and tactics, (ii) sales force effectiveness and (iii) portfolio expansion – new products, new markets and customer segments, new geographies and new channels of distribution. In addition to organic growth opportunities, we work with portfolio company management to build scalable platforms – management, systems and processes – capable of accelerating growth through acquisitions. In the past decade, we have helped our portfolio companies to complete over 250 follow-on acquisitions totaling more than $24 billion in enterprise value at the time of acquisition. This is the most interesting as THL will look to grow Alfresco through pricing, sales, and expansion.  Lots of good/bad expansion (could be more Alfresco consulting), hence the need to “wait and see”.
• Strategic Repositioning – We work with portfolio company management to assess and focus strategic priorities, including acquisition targets, to enhance a portfolio company’s competitive positioning. When integrated properly, acquisitions can strategically reposition a business through improved scale and competitiveness. It is hard to evaluate this last goal.  Having access to the other THL portfolio of companies, both for advice and as potential customers, as well as other THL resources and network, should benefit Alfresco.

Summary –  We give it an 8

On a scale from 1 to 10, we would give this announcement an 8 at first glance as it removes a significant question mark with Alfresco on who would be the buyer.  Thoughts behind our 8 include:

• Knowing is better than not knowing – for Alfresco customers, knowing the future will not be OpenText or something else is a great thing. A well-funded private equity firm focused on growth will be a long-term consistent “hand at the tiller” for Alfresco and avoid the uncertainty of a possible new buyer with competitive products just looking to milk the subscription revenue of existing Alfresco customers.
• Some Alfresco personnel churn will be good – some turnover of Alfresco employees that might have been hanging on for an exit will not be a bad thing. A new/updated team could bring new ideas and energy on marketing and positioning, not just focused on getting to an exit.
• Private Equity is better than most Public – Much of the focus of public companies is all about quarterly results, sometimes missing the longer and better strategy decisions for short-term gains. As a small piece in a big public company, would Alfresco get any attention or be just a cash cow as Documentum was within EMC?  What Alfresco does with the money will make the difference between being good or bad for customers.
• Private Equity doesn’t have the cache/install base – To get the “10”, whoever acquired Alfresco would need the cachet, market presence, and brand that would make it an easy customer purchase decision — someone like Amazon Web Services that has had such huge growth and cloud cachet with a large install base.  Not that Amazon was ever shopping, as they seem to prefer to build their own.  Even with Amazon, the risk of being just a small lost part within a large organization might also exist.

In a call this morning with Alan Pelz-Sharpe, founder and principal analyst at Deep Analysis and long-time follower of the ECM market, Alan offered:

“It was no surprise that Alfresco was acquired. It has been around over a decade and the injection of some fresh blood and access to finance to boost growth in their marketing, sales, development and even to potentially make an acquisition or two is positive. There will of course be the inevitable challenge of a cultural change and the clash of new ideas against the old. In addition, THL may also have plans to acquire more firms in the sector that will again shift the winds for Alfresco. But all in all, this looks like a good move for Alfresco, its customers and partners.”

Look for another more detailed post next week as we look to analyze previous THL purchases to forecast and predict our thoughts for Alfresco.  Let us know your thoughts below.