The lack of succession planning among small- and medium-sized enterprises (SMEs) represents a strategic source of untapped shareholder value.
According to Statistics Canada, the country is home to approximately 300,000 businesses with 20 employees or less and founders at retirement age, accounting for 7-8 per cent of GDP and billions in wealth to be transferred over the next decade without transition plans in place.
From a valuation standpoint, these businesses are broadly available at lower multiples because of:
- The many risks associated with their small size and the siloed nature of their operations, which require specialized business acumen to optimize and grow
- The private market’s less stringent regulatory oversight, allowing it to trade at a discount to public market prices
This dynamic opens the door for businesses with expertise in SMEs and mergers and acquisitions (M&A) to offer founders attractive exits, informed by orderly transition plans, and the opportunity to build a portfolio of synergistic holdings designed for growth and sustainable cash generation.
One such business, the newly listed holding company, Ciscom (CSE:CISC), has already put this roadmap into practice, successfully taking the reins from exiting entrepreneurs and strengthening acquisitions for long-term wealth creation.
The blue-sky opportunity in information and communications technology
Ciscom focuses on acquisitions in information and communications technology (ICT), a sector composed of more than 30,000 operating companies with big data slants, of which 3,500 businesses representing more than $10 billion in revenue fit the company’s acquisition criteria, which we’ll detail in the next section.
President and CFO Michel Pepin noted the company’s interest in ICT is about staying on the cutting edge. “If you can analyze data, you have the future in your hands,” he said in a recent interview with Stockhouse.
His view bears out in industry projections, with Global Data forecasting the Canadian ICT market to grow from US$70.2 billion in 2021 to US$102.25 billion in 2026. Statista, for its part, estimated the global ICT market at US$5.5 trillion in 2022, with Reliable Research projecting a CAGR of 12.6 per cent until 2030.
The ICT sector’s growth expectations come at a time of secular tech under-valuations because of COVID-induced cost, operational and management restructuring, as well as aggressive monetary policy cooling the global economy, nudging investors away from high-potential longer-term investments toward more stable cash flows.
According to microcap.co, revenue multiples for technology software companies have dropped steeply since 2022:
Source: Microcap.co.
Such losses offer Ciscom a diverse selection of potential acquirees at attractive prices, allowing the holding company to cast a wide net within ICT that includes but is not limited to:
- APIs
- Analytics
- Communications
- Software as a service
- Social media integration
- Business automation and work-flow
- Document processing and content management
- Technology-driven and big data marketing and advertising
The company’s broad focus is designed to accumulate complimentary technologies over time, each of them geared toward increasing clients’ customer acquisition and conversion rates while lowering costs and maximizing return on investment. In this way, management can sit at the table with tech founders and demonstrate how Ciscom is structured to continue their legacies over the long term.
The question then becomes, how is the company’s M&A strategy engineered to usher entrepreneurs into the next stage of their journeys while offering shareholders solid prospects of outsized returns?
A proven acquisition formula
Ciscom’s acquisition criteria are designed to single out successful businesses with organic growth potential and founders who are 1) keen to stay on and 2) interested in establishing a succession plan.
Management begins with SMEs that bring in $5 million-$30 million in revenue, or at a minimum $3 million in gross margin, whose proven histories of profitability have ample room to grow. This deal flow is predominantly accessed through referrals to avoid widely publicized opportunities at overinflated prices.
Management then conducts an assessment of potential synergies and leverage with existing portfolio holdings across sales, expenses, finance, infrastructure, procurement and management to ensure a harmonic fit and realizable value. Though this assessment is accretive to shareholders, organic growth is the fundamental component of Ciscom’s investment thesis.
Once an acquisition is determined to be worthwhile from a shareholder perspective, the holding company will extend an offer composed of cash, CISC shares as an added kicker, and an earn-out component to ensure high-quality performance.
“Because we buy siloed SMEs, we’re able to pick them up at a very good price. We’re buying below 6x EBITDA, and expect a jump to 12x to 15x EBITDA once we integrate companies into our public vehicle because of our acquisition criteria and our ability to support exiting entrepreneurs with employees of the same caliber and charisma,” Pepin said.
Acquisitions remain standalone entities in Buffett-style, decentralized fashion where major spending decisions require parent-company approval but day-to-day operations are left to each portfolio company, enabling founders and staff to stay onboard – as long as they’re willing to contribute, to continue crafting unique, personalized visions for their enterprises.
The company has already validated its approach in the marketplace with two big-data advertising and marketing technology acquisitions with combined 2022 revenue of $34 million. This figure affords Ciscom an EV/revenue multiple under 1, making it considerably undervalued against the ad and marketing tech market as a whole, which fell to a median EV/revenue multiple of 1.9x in Q4 2022, according to Ycharts.
The holding company’s first acquisition, Market Focus Direct (MFD), closed on Aug. 31, 2021, with financing from BMO. MFD offers proprietary customizable software applications for the efficient processing of big data. Its suite of solutions includes analytics, customer acquisition strategies, digital marketing, direct mail, flyer distribution management and related services for Canadian retailers and business-to-consumer companies.
Its second acquisition, Prospect Media Group (PMG), closed Sept. 30, 2022, with financing from HSBC. PMG has a more than 20-year track record as an integrated, data-driven media agency with a focus on Canadian retail clientele, including high-profile brand names known nationally, regionally and locally. It’s primarily focused on advertising and marketing technology, including consumer data and analytics, media planning and buying and the integration and optimization of print and digital media.
Ciscom is in the process of finalizing technology integrations between its two portfolio companies with the goal of maximizing synergies and offering clients more efficient targeting and data analytics capabilities. It has managed to save more than $500,000 in costs to date thanks to consolidation of duplicate departments and consumer data purchases.
“We manage and invest into businesses with a long-term view,” Pepin said. “We’re different from private equity, which gives you a three- to five-year runway, during which they pump you as much as they can and then they dump you. We do not make acquisitions for cost-cutting, where divisions that don’t fit together are integrated at the expense of the business and you start losing clients. I’d rather have a cost-basis that is 5 to 10 per cent higher and retain all clients.”
“That’s exactly it,” added Drew Reid, Ciscom’s executive chairman and CEO. “Roll your business into us and we’ll keep it going through organic growth and add to the bottom line.”
Ciscom’s growth playbook
Ciscom’s growth strategy rests on bolstering founders’ existing recipes for success, such that portfolio companies maximize client wallet share relative to products on offer, and shareholders benefit from ensuing increases in cash flow and earnings per share. This process may involve:
- Tax analysis and debt consolidation
- Process and capital expenditure streamlining
- Geographic expansion into untapped markets
- Onboarding new sales, account management and business development staff to catalyze lead generation
- Payable and receivable agreement renegotiations supported by the holding company’s increasing scale
- Sharing services and expertise across portfolio companies to minimize costs
- Cross-selling clients on products and services available across the Ciscom ecosystem to increase profitability
The company is led by two expert acquirers and business optimizers whose established track records are tailormade to deliver on this expansion plan.
Drew Reid brings more than 30 years of management experience in business development, strategic planning, real-estate development and M&A, which aligns well with solving the idiosyncratic problems keeping small businesses from adding market share. He also has a long history of creating value as a consultant for public companies, as well as through money market, institutional bond and equity trade desks for the likes of Bank of Tokyo, the Canadian Imperial Bank of Commerce and Burn Fry Ltd.
Michel Pepin, certified public accountant (CPA), chartered accountant (CA), and the company’s president and CFO, adds more than 35 years of global business experience as a board member and special advisor for public companies, private equity and family-owned businesses, during which time he built a reputation for improving processes, generating cash flows and maximizing return on investment across multiple industries.
Pepin’s leadership background in spearheading M&A deals, strategic corporate development, financial management and regulatory compliance spans IT, human resources, real estate, procurement, legal and insurance, making him ideally suited to assess business risk and identify SMEs worth acquiring.
The holding company also boasts two other CAs and CPAs on staff, Shaun Power and Eric Klein, strengthening its due diligence capabilities and ensuring a strict adherence to value-added transactions.
“The courtyard of mergers and acquisitions is full of frogs, not charming princes, so we make sure we choose our businesses right, such that our quest for growth never makes us any less diligent,” Pepin said.
A short window at a depressed price
Given Ciscom’s $34 million in revenue under management, the investing public is severely undervaluing the company at its current $9 million market cap, setting the stage for a surge in share price as management closes more acquisitions.
Early, private-stage investors have also been selling shares since the company’s initial listing on June 30, 2023, creating dislocation between its proven model and market sentiment to the tune of a 78 per cent discount from the IPO price. This bargain entry point clears the way for high-conviction shareholders to benefit from long-term compounding.
The holding company is projecting $446 million in revenue and $50.7 million in EBITDA by 2027, with a base case of 15-20 portfolio companies averaging $20 million in revenue.
This outlook will only be catalyzed once economic growth normalizes and inflation settles within the Bank of Canada’s target range of 1-3 per cent. The history of lower consumer prices rekindling risk-on sentiment and raising valuations should then kick in, allowing Ciscom to grow with a general market rebound and leverage its size toward more attractive acquisition terms.
The company is already putting measures in place to fortify its growth runway, including:
- Pursuing additional stock exchange listings to diversify its investor base
- Assessing how artificial intelligence could improve operations
- Expanding portfolio companies’ target clients beyond retail to telecom, manufacturing, home improvement and consumer packaged goods
With this broader reach and more efficient toolset, management is setting itself up for a momentous 2024, by the end of which, “contingent on the size of acquisitions we make, we’re confident we can get close to $100 million in revenue,” Pepin said.
During times of economic uncertainty, as evidenced by the TSX’s choppy performance over the past year, investors can either park their hard-earned dollars in cash and earn a few percentage points, or allocate to experienced managers with clear strategies designed to yield exponential returns, that is, if they’re fortunate enough to source any before the broader market piles in and inflates the price of entry.
Still in its infancy as a publicly traded company – with its initial quarterly financial report slated for Aug. 29, 2023 – Ciscom represents this rare combination of an underappreciated stock backed by standout management and a business plan with market-beating potential. Given the stock market’s bias toward value creation, odds are this opportunity will not last for long, as more investors with well-honed due diligence processes step in and take stakes in the holding company’s budding growth story.
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