Portfolio Updates

Gresham increases global reach and business streams with Electra Technologies acquisition


Gresham Technologies plc, which provides data integrity, banking integration, payments, and cash management solutions to the financial services sector, has announced the transformative acquisition of Electra Technologies, an established US based software provider. An equity issue of £21m will fund the US$39m consideration, supplemented by existing cash resources. Gresham issued the placing shares at no discount to the prevailing market price – a strong sign of investor enthusiasm for the transaction.

Electra is a leading provider of post-trade reconciliation software and data services to fund managers, predominantly in the US. Founded in 1998, Electra’s revenues are 97% recurring and growing at 10% a year. It boasts a customer base that includes a third of the largest US institutional fund managers, such as BNY Mellon and Nomura as well as hedge funds, insurance companies and fund administrators. There is very little customer overlap with Gresham.

Kestrel Insight

Customer shift to OTS

One notable result of the pandemic is the move by software buyers towards Off-The-Shelf (“OTS”) products to help their digitisation journey. OTS products allow users to self-configure software, often without the need for expensive consultants, leading to shorter implementation periods and lower costs.

Kestrel’s portfolio companies that are selling genuine SaaS (web-based, multi-tenant) products have performed better than those offering complex product integration; large established enterprises have old and embedded software, which does not easily integrate with SaaS, and customers in industries such as defence and finance are behind in adopting the public cloud.

Gresham sells typically low volumes of high-value projects, each requiring significant consulting and integration work. This change in customer behaviour toward OTS products therefore proved a headwind for Gresham during 2020, when multiple lockdowns and lack of international travel lead to longer sales cycles and periods of implementation.

New business streams

This is one of the main reasons the acquisition of Electra dovetails so well with Gresham’s existing offering: Electra’s products are as close to OTS as you can get in the finance industry. This will allow Gresham’s sales team to attract new clients with a existing highly configurable offering, and facilitate a new business stream, with a more rapid order to cash cycle.

Internationalisation benefits

Further potential benefits include the internationalisation of Electra’s US-centric customer base (through Gresham’s global distribution network), and the opportunity for Gresham to sell its own products into Electra’s larger US customers, with more complex data reconciliation requirements.

Cross Synergies

Electra has successfully transitioned to a fully recurring revenue model and generated 10% growth in recurring revenues to £10.1m in 2020. After expensing development costs, EBITDA was £0.9m in 2020. In the year to December 2022, the first full-year of acquisition, Electra is expected to enhance Gresham’s EBITDA by c.15%, before any uplift from cross-selling. We also expect cost synergies from combining group functions, although we would encourage Gresham to invest these savings to address growth opportunities.

Gresham’s forecast growth in recurring revenue is set to drive operating leverage, manifesting in rapidly improving cashflow. Electra should augment this profile, which we believe will become apparent as the market digests the benefits of this acquisition.

 

Kestrel’s Portfolio Updates should neither be construed as investment research, nor the provision of investment advice, nor a recommendation. This article should be viewed as short term commentary only based on the latest economic statistics, company results or information on upcoming releases or events. It is only a brief unsubstantiated summary of Kestrel’s opinion on such information as at the date of publication and no reliance may be placed upon any contents of this article by the recipient.


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