San Francisco-based buyout firm Golden Gate Capital has found a trail of valuable crumbs behind Merant PLC as of late. The firm this month bought its second corporate extraction from the U.K.-based provider of software and services, picking up DataDirect Technologies, a middleware company, for $30 million.
The transaction, which gives Golden Gate approximately 80% of the company and management the remainder, was financed with a senior bank facility provided by Fleet Bank and equity from Golden Gate’s debut fund.
In a market where many private equity players are finding the debt piece of a transaction the toughest to secure, few would expect Golden Gate to close a software deal much less three since August. Yet, Prescott Ashe, a co-founder and managing director of the firm, said financing the DataDirect deal was surprisingly easy.
“Fleet was surprisingly astute when it came to software credit,” he said. “There are very few lenders out there that acutally understand software companies. But I think we were able to articulate the virtues of DataDirect, and so they were able to get us to the finish line quite quickly.”
Ashe described several virtues of the company that attracted Golden Gate to the transaction. Golden Gate, which focuses on technology buyouts, liked that DataDirect serves a large and growing market within the middleware space – accounting for approximately $3.5 billion in total revenue and forecasted to grow into the strong double digits, Ashe said.
“Within the data access segment, which is one of the segments of middleware, DataDirect is clearly the market leader with a five times multiple of revenue over its next largest competitor,” he said. That fact supported the firm’s preference for companies with “an attractive competitive position.”
Next, DataDirect employs a high margin business model, and therefore has been profitable and growing through its own internally generated funds, said Ashe. “Because of that, it’s just something that fits better with the Golden Gate Capital approach, which is buying existing companies that are self-sustaining and help them grow faster, versus buying companies that are losing money and trying to get them to break even.”
Finally, Golden Gate was attracted to the management team, which remain in tact and will add a few professionals. Ashe said the team has equity incentives and a common vision that bodes well for its growth with Golden Gate. “[The management team has] been operating under an umbrella of Merant, and they’ve been viewed as a stepchild. So this is their opportunity to show the world their product and its capabilities,” he said.
In August, Golden Gate acquired Micro Focus, a software development tools company, from Merant for $62.5 million. The deal was Golden Gate’s first control stake buyout (Buyouts Aug. 27, p. 9). Later that month, the firm picked up Nu Visions, an EMS company, from Nu Horizons Electronics Corp. for approximately $31.5 million (Buyouts Sept. 10, p. 18).