Basware Expands Its Open Network with German Acquisition

On January 17, 2012, Basware kicked off the New Year by announcing that it had acquired First Businesspost GmbH (“1stbp”)for €12.2 million, which includes assumption of the company’s debt (€ 3.2 million). Before we get into an analysis of the deal, here are some key figures for 1stbp in the year ended 2011:

• Revenues: €2.4 million
• EBITDA: €0.5 million
• 4.5 million transactions in 2011 (90% e-invoices +10% POs)
• Approximately 39 employees, 28 in Munich, 11 in Romania (R&D)
• Approximately 150 receiver clients and 7,000 suppliers

1stbp is one of the largest eInvoicing providers in Germany, which in turn is the largest market in Europe. With this acquisition Basware becomes the largest German eInvoicing provider by transaction volume, something that may not be taken lightly by SAP, who made its first true inroads into the space with its complete acquisition of Crossgate in September, 2011. To provide some context for the opportunity in front of Basware, annually, there are approximately 15-17 billion B2B invoices processed in Europe and Germany makes up approximately 20% of that volume. With buyer/supplier preferences in Europe now leaning more towards eInvoices, as a well-capitalized player with a leading position in many different countries, Basware is well positioned for growth within Germany and Europe as a whole.

With its focus on large automotive and retail customers, 1stbp has many of Germany’s largest companies including Daimler, Audi, MAN, VW and Deutsche Telecom using its network to process invoices. From a technology perspective, 1stbp has an innovative approach to supplier on-boarding with its “Virtual Printer Driver Technology”. This mechanism of on-boarding suppliers is quite unique in the industry and… (more in final report)

With this acquisition, Basware valued 1stbp at roughly five times its revenue which would be high for a traditional software company acquisition (which often have multiples in the 2x-3x range), but 1stbp is a network provider whose revenue is more highly prized by the capital markets (Basware is listed on the Helsinki Stock exchange). Network generated revenues are more highly-prized than other revenue streams in today’s market and thus, network providers command higher valuations than those companies who primarily generate license and maintenance fee revenue. Valuations are higher for network revenues because they are recurring (most networks report customer retention rates above 95%) and they are scalable which means that as networks grow in size, the incremental revenue that they generate can become highly profitable. The other factor to consider in this valuation is the recent growth of 1stbp’s network and revenue. The fact that 1stbp showed both of these attributes in Europe’s largest economy while offering a differentiated technology is why it was Basware’s first target.

The eInvoicing/B2B Network space was steaming in 2011 and it will only get hotter in 2012. We believe that Basware intends to be dominant player in Europe and globally. In terms of M&A activity, Basware has been quite consistent having made five acquisitions (including 1stbp) since 2008. To date, all acquisitions have been focused on the European market and we expect that that will remain their focus.

While there are hundreds of eInvoicing providers (more than 400) in Europe, most are small and only focus on certain countries others or specific industries – for example, TecCom (automotive industry) and B2Boost (gaming and entertainment industry focus). While this landscape makes it more difficult for the larger network providers to consolidate the market, we believe that they will remain active on a global scale with strategies focused on increasing network size and transaction volume. We expect Basware and Ariba to lead the way, followed by SAP (once it has fully-integrated Crossgate) and possibly Oracle and IBM. If IBM chooses to get serious about this space (and it looks like they’re going that way with ‘Smarter Commerce’) forget the 800 pound gorilla, they’ll be the 1,800 pound gorilla.

I definitely expect consolidation to continue this year and the next. Recent consolidation has been focused in Europe’s largest markets Germany, France but I expect that it will expand to the Nordics  and the UK and eventually even Russia. Russia is now one of Europe’s largest economies and the latest country to recognize and accept electronic documents as legal for VAT compliance and management, this presents a great opportunity. Another region to watch is of course Latin America with Brazil and Mexico making big moves towards eInvoicing adoption.

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