If you’re reading this article you’ve probably heard of CEB, if not, then their seemingly innocent SHL psychometric tests that are the Iron Gate keepers behind any Investment Banking application. Well, they’ve recently been acquired by Gartner, a technology information consultancy firm that specialises in providing advisory services to companies that operate in IT sphere.
Digging straight into the financials, the deal is a 70-30 cash stock transaction with $54.00 in cash and 0.2284 shares of Gartner common stock for each share of CEB common stock which represents a 31% premium over the Friday prior. The stock levels are fairly high, indicating CEB’s confidence for the future of the newly merged company. Gartner stock prices at the time of the transaction were trading at all time though, so whether CEB are getting an inflated stock deal remains to be seen.
Another interesting point about the financials in this transaction is that it’s instantly accretive. An accretive transaction means the merged company’s EPS(earnings per share) will increase, and this is something investors are unsurprisingly pleased about. Now, generally in M&A transactions accretion doesn’t tend to happen until fairly far in the future – waiting over 2 years for accretion isn’t an uncommon phenomenon. In fact it’s usually the job of the slick sell advisor to dress up their client’s company as much as possible and weave a story to demonstrate why accretion will happen sooner rather than later. Luckily, Centerview Partners(the sell side advisors for this transaction) get to avoid all that extra hassle and this transaction will lead to accretion the second the paper work is signed, creating great short term value for shareholders at Gartner.
For those looking to add some buzz works to their investment banking interviews, I’ve done a bit of data collection on the pricing of the deal that you will hopefully find useful as regurgitating material. CEB has an EBITDA of $115m. Going by the acquisition price, we’ve got an EV/EBITDA of 28.7. That is quite high, to say the least. According to New York Business School system software companies have an EV/EBITDA of 19, so CEB is definitely going for a significant premium. Why might this be? Well, the first reason is what we discussed earlier, instant accretion. Shareholders at Gartner get instant value from the deal, and that provides Gartner’s management the traction they needed to secure a competitive bid. Also, Centerview Partners are known for their aggressive bidding and may have played a role in furthering their client’s valuation. Finally, the deal has the potential for significant long term synergies. Synergies is the idea that a newly merged company will be more valuable than simply the sum of the two individual companies, the idea that 1+1=3 if you will. Revenue synergies are expected to be created through cross selling CEB’s and Gartner’s suite of IT services to their distinct and extensive list of clients and combining complementary products such as psychometric testing and human resource optimization to enhance the branding of the newly merged company. Furthermore, Gartner expects to realize annualized cost synergies of approximately $25 million - $50 million starting in 2018 through cutting overlapping R&D facilities and integrating system software’s.
Overall, despite the hefty price tag of the M&A deal, I would argue the instant accretion and potential for long term synergies make it a worthwhile transaction. Hopefully management’s good mood translates to making those pesky numerical tests a bit easier!