Thoma Bravo—Citect Corporation Take-Private

| March 29, 2017

Question
9-209-022
AUGUST 20, 2008

NABIL N. EL-HAGE
MICHELLE C. SIMON

Thoma Bravo—Citect Corporation Take-Private
On February 15, 2006, Orlando Bravo, Scott Crabill, Holden Spaht and Robert Sayle contemplated
their next move as they met in their 32nd floor conference room in San Francisco’s landmark
Transamerica Pyramid building. The Thoma Bravo deal team (see Exhibit 1 for team biographies)
had just learned they had been outbid again by a formidable strategic buyer in the acquisition of
publicly traded Australian software vendor, Citect Corporation. The team reflected on how the
proposed transaction had evolved so far. Remaining firm in the belief that they could spur significant
growth and operational improvements at Citect, the deal team revisited the question of how far they
could go to win the deal.

Thoma Bravo—Software Experience and Investment Criteria
Thoma Bravo (“TB”) was one of the few active and successful private equity firms involved in the
software sector. At year-end 2005, TB was investing its seventh fund, Thoma Cressey Fund VII, L.P., a
2001-vintage, $554 million fund, while completing fundraising for Thoma Cressey Fund VIII, L.P, a
$765 million fund (see Exhibit 2 for a brief history of TB).
TB’s software team, led by Managing Partner Orlando Bravo, had generated deal flow comprising
nearly 60% of Fund VII’s investments. The fund’s remaining investments fell into other areas of the
firm’s expertise: healthcare, education and selected services companies. With experience executing a
wide variety of software transactions including LBOs, recapitalizations, divisional spinouts and
direct investments in public companies, TB had recently engaged in a number of take-private
transactions in the sector. The team focused on companies with revenues exceeding $50 million that
delivered mission-critical product suites.
Consistent with TB’s investment strategy in other industries, the software team’s philosophy was
centered on the firm’s “buy and build” approach. With this approach, TB sought to partner with
management teams who embraced a vision of becoming consolidators in their industries. Each of
TB’s portfolio companies operated independently, but worked in conjunction with TB to enhance
organic growth and implement acquisition plans.
Although debt financing was plentiful for private equity transactions in 2005 and early 2006, TB
believed that its edge as an investor was not based on financial engineering, but rather from
operational improvements and growth through acquisitions. TB therefore took a highly analytical
approach in evaluating investment opportunities, making particular use of benchmarking against
metrics from prior software investments. TB rounded out its analysis with a qualitative assessment of
the management team and likelihood of deal completion.
________________________________________________________________________________________________________________
Professor Nabil N. El-Hage and Michelle C. Simon (MBA 2008) prepared this case. HBS cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized,
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This document is authorized for use by Nicole Donnelly, from 1/22/2016 to 3/5/2016, in the course:
BA 6074: Mergers and Acquisitions – Allen (Spring 2016), Southern Methodist University.
Any unauthorized use or reproduction of this document is strictly prohibited.

209-022

Thoma Bravo—Citect Corporation Take-Private

Citect Investment Rationale and Strategy
As a potential investment, Citect fit squarely into TB’s sweet spot for middle market software
companies. Founded during 1973 in Sydney, Australia, as a systems integration company, Citect was
one of the largest independent suppliers of industrial automation software with more than 8% of the
global SCADA market (see Exhibit 3 for an additional description of Citect). Reliable plant floor
software, including SCADA1 and MES2 solutions, was critical for plant operations managers and
therefore a characteristic that TB valued in a target company. TB also found that its competitors
largely ignored this segment of the software market.
Citect went public on the Australian stock exchange in 1997 and subsequently expanded its
international presence. The company’s revenue model, standard to most perpetual software license
vendors, consisted of license revenue, services revenue and maintenance/support revenue. An
average deal for Citect, which included multiple licenses, amounted to approximately A$15,000 of
license revenue and A$15,000 of services revenue. The company sold approximately 10,000 new
licenses per year and in 2005 had an installed base of approximately 20,000 sites and 100,000 licenses.
Additionally, Citect had begun to mandate that new customers purchase support for their software,
leading to higher recurring revenues over time. TB saw this as a significant opportunity for
improvement as Citect only earned 14% of its total revenue from maintenance services in 2004,
compared to TB’s benchmark of 30%–45% for a typical mature software company. Maintenance
services were also higher margin than professional services (70% versus 40% gross margin,
respectively). In 2005, Citect was expected to generate A$68.3 million in revenue and A$7.4 million in
EBITDA.
TB envisioned a three-pronged strategy for Citect: cost reduction, internal growth and segment
consolidation.
In TB’s view, Citect had a powerful franchise that was not being fully leveraged. Working with
Citect CEO Richard Webb, the team devised a significant cost reduction plan that would be enacted
upon the close of the transaction. The TB team had been impressed by management and believed that
they could work constructively to devise and execute their plans for the business.
Citect was already achieving respectable growth, with total revenue expected to grow by 12% in
2005. A focus on enhancing internal growth was the second part of TB’s plan. Specifically, by
targeting growth in maintenance revenue through its existing customer base, Citect could tap a high
margin source of revenue. TB and Citect developed a plan to offer four levels of software
maintenance, allowing customers to select different packages. Changes to Citect’s distributor
arrangements and pricing strategy would also maximize the internal growth rate.
The last part of TB’s strategy was to consolidate the industrial automation software industry. TB
had already identified and held preliminary discussions with many of Citect’s peers; viewing Citect
as a platform company from which they could “buy and build.”

1 SCADA stands for Supervisory Control and Data Acquisition. This type of software is often used in power plants, oil and gas
refining, telecommunications, transportation, and waste control.
2 MES stands for Manufacturing Execution Software. MES software typically linked to a company’s enterprise resource
planning (ERP) software to provide additional analysis and functionality for the shop or plant floor.

2

This document is authorized for use by Nicole Donnelly, from 1/22/2016 to 3/5/2016, in the course:
BA 6074: Mergers and Acquisitions – Allen (Spring 2016), Southern Methodist University.
Any unauthorized use or reproduction of this document is strictly prohibited.

Thoma Bravo—Citect Corporation Take-Private

209-022

Transaction History
As part of a TB initiative to identify prospective investments in automation software companies,
TB reached out to Webb in early October 2005 to discuss the possibility of a management buyout.
Webb had been hired by Citect in March 2005 to improve profitability and was also a shareholder.

Schneider Proposal and TB’s Continued Pursuit
On October 19, 2005, shortly after TB’s initial contact with Citect, the software vendor announced
a merger agreement with Schneider Electric S.A. (“Schneider”), a French-based manufacturer of
equipment for electrical distribution and industrial automation (see Exhibit 4 for a description of
Schneider). At the time of the offer, Schneider’s market cap was approximately €18 billion.
Schneider’s offer, via a “scheme of arrangement,” to acquire all of Citect’s outstanding shares at
A$1.55 per share (including a A$0.05 per share special dividend3) represented a 60% premium to
Citect’s average price over the preceding 30 trading days and valued the company at 1.2x 2005E
revenue and 10.9x 2005E EBITDA.4,5 Citect’s board of directors endorsed the merger and
recommended it be approved by shareholders. As part of the transaction, Citect CEO Rick Webb was
expected to step down a month after closing, while all other employees were expected to be retained.
A shareholder vote was scheduled for late December, following the distribution of materials detailing
the proposed transaction in November.6 The press reported that acquisition talks had been under
way for three months.7 Following the announcement, Citect’s shares rose 40% to A$1.52 (see
Exhibit 5 for Citect’s historical financial statements).
While TB continued to be interested in Citect and was surprised by Schneider’s offer, the team
was not panicked because the offer required a number of time-intensive approvals before it could
prevail. On November 28th, Webb phoned TB Principal Holden Spaht to gauge the private equity
firm’s interest in a deal. Spaht then sought to schedule a call with David Mortimer, Citect’s
Chairman, recognizing that he would have to win him over in order to access the data room and
obtain relevant information.
Webb informed Spaht that he would refrain from entertaining conversations with other private
equity players for the time being, because of his comfort with TB and their industry specific
knowledge. Webb also notified Spaht that under Australian takeover law, Schneider would have the
opportunity to increase its bid until the Australian court determined a date for the Citect shareholder
vote. If Citect received a competing bid between the time that the shareholder vote was set and the
shareholder vote took place, both offers would be considered during a single shareholder meeting.
On November 29th, Mortimer granted TB access to the data room. TB found that most of the
information was already available publicly and was therefore of limited utility.

3 To be paid by Citect upon shareholder acceptance of the deal.
4 Including a small payment ranging from A$0.02 to A$0.05 per option to holders of approximately 1.4 million options.
5 “Schneider Electric Offer for Citect,” Citect Corp. press release (Sydney, Australia, October 19, 2005), via Factiva, accessed
March 2008.
6 Included in the announcement and agreement was a No Solicitation clause whereby Citect would be disallowed from

soliciting other offers from the time of the announcement until the transaction information materials were distributed to Citect
shareholders (with distribution expected for November).
7 “Citect the target of $80 million acquisition.” Australian Associated Press Financial News Wire, October 19, 2005, via Factiva,
accessed March 2008.

3

This document is authorized for use by Nicole Donnelly, from 1/22/2016 to 3/5/2016, in the course:
BA 6074: Mergers and Acquisitions – Allen (Spring 2016), Southern Methodist University.
Any unauthorized use or reproduction of this document is strictly prohibited.

209-022

Thoma Bravo—Citect Corporation Take-Private

On December 5th, the Australian court set January 12th as the date for the Citect shareholder vote.
TB continued to discuss a potential transaction with Mortimer and Webb, deciding that with a date
set for the shareholder vote, they were pressed to present a formal offer. Nonetheless, TB knew that it
would need complete further due diligence on the business.

TB’s Initial Proposal and Management Meetings
TB’s preliminary conversations with Citect’s CEO and the deal team’s extensive experience in the
software industry, made them confident enough to submit a bid to Citect’s management of A$1.75
per share8 on December 16th. A meeting with Webb and CFO Ken McDonnell was set for the
following week in San Francisco to discuss the details of the TB proposal. The meetings gave the TB
team a chance to formally introduce themselves and further sell the firm’s experience in the sector.
The San Francisco meeting proved to be highly productive and TB’s excitement regarding the deal
grew. Webb had outlined his thoughts on where Citect could improve margins and he was optimistic
about the dramatic results they could achieve with TB as its partner. The TB deal team felt that Citect
was a good fit for its portfolio but was conscious of the impending shareholder meeting and the need
to make the economics of the deal compelling.
TB firmly believed that sustainable change in a portfolio company would only take place if the
portfolio company’s management embraced it. While TB served as a guide and advisor to
management through these changes, it was convinced that organically grown improvement plans
had a higher probability of success. Before the conclusion of the meeting in San Francisco, Bravo and
Spaht asked Webb and McDonnell to prepare a realistic improvement plan for the business. TB was
encouraged when Webb presented an aggressive and realistic improvement plan immediately
following his return to Sydney.

TB’s Due Diligence and Adjusted Bid
With their enthusiasm for the deal high, TB determined that further due diligence was justified
and decided to fly the deal team to Australia during the Christmas holidays. On December 26th,
Bravo, Crabill and Spaht boarded a 10:30pm flight from San Francisco to Sydney. Once there, the
team set out on an aggressive schedule of meetings with all of Citect’s senior and middle
management. TB also brought Jim Lines, a former CFO of the SABRE group and a TB operating
partner, to lend his opinion on Citect’s operations.
The deal team rounded out their visit by contacting potential lenders and by hiring a global
accounting firm to review Citect’s financials. Lenders for the deal soon emerged, and the accountants
confirmed the financial figures with one exception. Within Citect’s China subsidiary, the accountants
discovered a host of issues, including a material sum of bad receivables. While the Chinese
operations were a small contributor to Citect’s overall business, the problems uncovered were
noteworthy. The TB team accounted for this risk in their financial model and revised their valuation
and corresponding bid for Citect downward to A$1.70 per share,9 from the initial A$1.75.

8 Including the special dividend of A$0.05 to be paid by Citect upon shareholder acceptance, congruent with the Schneider
proposal.
9 Including the special dividend of A$0.05 to be paid by Citect upon shareholder acceptance.

4

This document is authorized for use by Nicole Donnelly, from 1/22/2016 to 3/5/2016, in the course:
BA 6074: Mergers and Acquisitions – Allen (Spring 2016), Southern Methodist University.
Any unauthorized use or reproduction of this document is strictly prohibited.

Thoma Bravo—Citect Corporation Take-Private

209-022

TB’s offer of A$1.70 per share equated to an aggregate value of A$88.7 million plus A$9.1 million
of estimated fees and expenses.10 TB planned to finance a portion of the purchase with debt capital.
One large financial institution proposed a term sheet that the deal team deemed most attractive. The
bank agreed to provide A$17.5 million of Term A financing at an interest rate of LIBOR plus 225 basis
points, A$17.5 million of Term B financing at an interest rate of LIBOR plus 275 basis points and
A$5.0 million of Term C financing at a rate of LIBOR plus 450 basis points. The A$57.8 million of
equity required would come from TB’s Fund VII.11 The offer represented a premium of 10% over the
Schneider proposal and valued the company at approximately 1.3x 2005E revenues and 11.9x 2005E
EBITDA. However, as the TB deal team saw it, the “effective” EBITDA multiple was really closer to
6x, based on the improved EBITDA of A$14.6 million that the team expected for Citect in 2006.
Paramount to this assessment was the team’s expectation of what improvements could be achieved
at Citect under TB ownership. By using input from Citect’s managers, and TB’s operating partners (Jim
Lines and Marcel Bernard), TB developed expectations for Citect’s business. Drawing on experience
from other software investments, the parties agreed that Citect could attain a 20% EBITDA margin in
2006 (up from an 11% in 2005). Webb had already demonstrated his ability to improve margins during
his short tenure at Citect. With revenues expected to grow just under 7%, Citect would recognize
approximately A$72.9 million in revenue and A$14.6 million in EBITDA in 2006. Between 2006 and
2012, the TB team expected that Citect could improve its EBITDA margin to 25% (Exhibit 6 details TB’s
financial projections for Citect). Much of the initial improvement in financial performance was
attributable to cost savings, Table 1 details TB’s 2006 cost reduction plan for Citect.
Table 1: 2006 Cost Savings Summary
Personnel Costs
Marketing
Travel
Board/Public Costs
Total

A$6.7
A$1.5
A$0.5
A$0.5
A$9.2 million

Source: Company documents.

TB’s rough metric for whether a deal “worked” from an economic perspective was a minimum
ROI of 2.0–2.5x over four to five years. The return scenarios for the Citect deal were very attractive.
Assuming a conservative EBITDA exit multiple of 8.0x, the model showed that the investors would
stand to return 3.0x their money and an IRR of 31.2% in four years. Table 2 depicts additional returns
scenarios. Exhibit 7 details TB’s financial model at the offer price of A$1.70 per share.
Table 2: Investor Returns Scenarios at A$1.70 per share
Exit Multiple
Revenue
EBITDA
0.8x
7.0x
0.8x
7.5x
0.9x
8.0x
0.9x
8.5x
1.0x
9.0x
Source: Company documents.

Return on Investment
Year 3
2.1x
2.2x
2.4x
2.5x
2.7x

Year 4
2.6x
2.8x
3.0x
3.1x
3.3x

IRR
Year 5
3.0x
3.2x
3.4x
3.6x
3.8x

Year 3
27.6%
30.6%
33.6%
36.4%
39.1%

Year 4
27.2%
29.2%
31.2%
33.1%
35.0%

Year 5
24.9%
26.4%
27.8%
29.2%
30.5%

10 Citect had no debt outstanding and a cash balance of A$2 million. To calculate equity value, TB used the diluted share count
of 53.3 million shares, which included 0.4 million Series 1 and 2 performance rights that would convert to basic shares upon a
change of control, plus a value of A$0.1 million paid for the approximately 1.4 million options outstanding. Additionally, TB
estimated fees and expenses at A$6.1 million plus a payment of approximately A$3.0 million for the special dividend.
11 With this structure, TB was pushing the boundaries of its Fund VII mandate that limited the Fund’s investments outside of
the U.S. and Canada to 15% of the Fund’s $554 million in commitments.

5

This document is authorized for use by Nicole Donnelly, from 1/22/2016 to 3/5/2016, in the course:
BA 6074: Mergers and Acquisitions – Allen (Spring 2016), Southern Methodist University.
Any unauthorized use or reproduction of this document is strictly prohibited.

209-022

Thoma Bravo—Citect Corporation Take-Private

Despite the robust return scenarios indicated by the projections, the deal team recognized that
paying more than 11x EBITDA would be a high multiple to pay for a software company. Over the ten
years that TB had focused on the sector, it had witnessed rising transaction multiples, from 6.0–8.0x
EBITDA initially, to 8.0–10.0x EBITDA.12 TB was now contemplating paying an even higher multiple
for Citect.

TB’s Offer Announcement
On January 6, 2006, just six days prior to their scheduled shareholder meeting, Citect publicly
announced that it had received a superior takeover offer from TB of A$1.70 per share.13,14 Citect’s
Board of Directors recommended that shareholders accept the offer in lieu of the Schneider proposal.
TB’s offer gave shareholders the option to tender their shares at the offer price or wait for the
shareholder vote during which both outstanding offers would be considered. TB’s offer was
conditional on acceptance by 50.1% of the shares and on the Schneider proposal not proceeding.15
The Australian high court proceeded to postpone the Citect shareholder meeting until February 16th
in order to allow Citect shareholders to contemplate the new offer. By January 23rd, Citect
shareholders started to receive a booklet detailing the terms of the TB offer, triggering a one-month
deadline until its expiration.

Schneider Counteroffer and TB’s Response
On January 25th, Schneider countered with a revised proposal to acquire Citect at A$1.90 per
share.16 The Citect Board reversed their recommendation, now endorsing the new Schneider
proposal. Citect’s stock traded up to A$1.92 following the announcement.
Not entirely surprised by Schneider’s counteroffer, the TB deal team identified two viable
responses. First, TB could amend its current takeover agreement above the A$1.70 per share17 offer.
While TB’s model showed that it could increase its offer price given the continued strength of Citect’s
business, the team was wary of a bidding war if they simply countered with a higher offer.
Alternatively, TB could seek to acquire a large percentage of Citect shares by negotiating directly
with institutional shareholders. The deal team believed that such a move would likely block the

12 EBITDA was considered a relatively good proxy for cash flow in the software business, since software companies typically
required minimal capex or working capital.
13 Including the special dividend of A$0.05 to be paid by Citect upon shareholder acceptance. In addition, TB offered A$0.04 to
$0.09 per option for approximately 1.4 million options outstanding.
14 TB’s offer was structured as a takeover or tender offer. From TB’s perspective, this offer held the possible advantage of
speed to completion since shareholders could tender their shares at any time between the offer date and the offer expiration
date, rather than wait for a scheduled shareholder meeting as in the case of a Scheme of Arrangement. The minimum amount
of time outstanding for a takeover offer was 30 days. The downside to this type of offer was that 90% of the outstanding shares
had to be tendered before TB could force a consolidation of 100% of the shares.
15 Brian Frith, “Dogged Schneider’s Gripe Sets Takeovers Panel a Poser,” The Australian, February 17, 2006, via Factiva,
accessed April 2008.
16 Including the special dividend of A$0.05 to be paid by Citect upon shareholder acceptance. Schneider’s offer for Citect’s
outstanding options also increased to between A$0.045 and A$0.101 per option for approximately 1.4 million options
outstanding.
17 Including the special dividend of A$0.05 to be paid by Citect upon shareholder acceptance.

6

This document is authorized for use by Nicole Donnelly, from 1/22/2016 to 3/5/2016, in the course:
BA 6074: Mergers and Acquisitions – Allen (Spring 2016), Southern Methodist University.
Any unauthorized use or reproduction of this document is strictly prohibited.

Thoma Bravo—Citect Corporation Take-Private

209-022

Schneider deal.18 However, this option would require further approval by TB’s investment
committee since this was not a typical use of the Funds’ capital. The deal team also had to consider
Fund VII’s partnership agreement, which limited the Fund’s investments outside of the US and
Canada to 15% of the Fund’s $554 million in commitments.

Acquiring a Foothold and Revising the Takeover Offer
TB observed that although Citect was diminutive in size relative to industrial automation giant
Schneider, the strategic acquirer seemed to have taken a special interest in Citect and demonstrated a
willingness to bid up the price of the asset. With these considerations in mind, TB pinpointed several
institutions with substantial stakes in Citect. The deal team believed that if TB could purchase 15% of
Citect’s outstanding shares via off-market, negotiated transactions, it would be able to thwart
Schneider’s deal if it went to a shareholder vote.
By February 10th, TB had purchased a block of approximately 8 million shares from Citect’s
institutional shareholders at a price of A$2.00 per share, approximately 15% of the outstanding
shares. With this foothold, TB publicly announced that it was the largest shareholder and that it
would revise its outstanding takeover offer to A$2.00 per share.19 Citect’s Board immediately
recommended that shareholders accept the revised TB offer.

Schneider Response
On February 15th, only one day prior to the shareholder meeting, an undeterred Schneider
returned with a…

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