Shares of Dye & Durham Ltd. soared to a new high Thursday after the Toronto company said it would buy Canada’s largest provider of real estate practice management software, DoProcess LP, from OMERS-owned Teranet Inc. for $530-million.
It’s D&D’s largest acquisition and the fourth disclosed by the legal software industry consolidator since it went public in July. It could also lead to higher costs for law firms and their clients, as Dye & Durham typically increases prices charged by companies it acquires by 15 per cent to 20 per cent.
“This is a transformative acquisition for us,” D&D chief executive Matt Proud said in an interview. “This is our No. 1 competitor. It’s not just about the financial metrics – those are important – but the ability to be able to serve your customers better, have extended technology reach. It just puts a huge moat around our business, which is almost impenetrable.”
To finance the deal, D&D has entered into a $510-million debt facility with Bank of Nova Scotia, while OMERS’s infrastructure division will buy $30-million of its stock. D&D is also selling $225-million in stock to five of its institutional shareholders in a private placement underwritten by Canaccord Genuity, issuing 6.5 million shares at $34.65 each, a 1-per-cent discount to the stock’s Wednesday closing price.
The stock shot up Thursday to as much as $43.58 before closing at $42.94, up 27 per cent. That gave D&D a market capitalization of $2.4-billion – more than seven times its valuation when it went public in July.
Investors have been receptive to consolidation plays in the Canadian tech sector. While some, such as Open Text Corp. and Constellation Software, have focused on buying mature businesses, more recent public companies, such as Lightspeed POS Inc. and Nuvei Corp., in faster growing segments have also won investor support for deals.
Few have experienced D&D’s success in its short life as a public company, as it benefited from heightened market interest in tech stocks, better-than-expected results and warm investor reception to its deals. “That’s our business strategy,” Mr. Proud said. “We’re set up to acquire, integrate and operate businesses. We’re really good at it.”
In addition to DoProcess, D&D last Friday agreed to pay $87-million for the property division of SAI Global, which sells online technology for lawyers to handle property transactions in Australia. Since July, it has also bought the owner of Britain-based Property Information Exchange, which provides online real estate due diligence services, for $54.5-million, and an unidentified firm for $7.2-million.
To pay for deals, D&D has leaned heavily on public markets. Prior to this deal, it had raised $250-million in two bought equity deals since the initial public offering, which raised $172.5-mllion.
While D&D stock trades at about 15 to 20 times its forecast adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for its fiscal year ended June 30, 2022, it typically aims to pay five times adjusted EBITDA, factoring in cost synergies, said BMO Capital Markets analyst Thanos Moschopoulos.
He added clients of acquired companies tend to stay even after D&D hikes prices. Asked if DoProcess clients should expect prices to rise, Mr. Proud said: “It’s too early. It’s business as usual, that’s the best way to put it.”
Mr. Moschopoulos said D&D typically buys businesses that complement what it already owns. It is a big player in Western Canada providing online workflow management software for real estate lawyers. With DoProcess, it will do the same in Ontario, where it lacked a presence, while knocking out a Western rival, said Jeff Mo, a portfolio manager with Calgary’s Mawer Investment Management, a D&D investor.
DoProcess “is probably, out of all the acquisitions they’ve done, the one that has the most natural synergies,” Mr. Mo said. “We are in a wait-and-see mode to see how well D&D can integrate the acquisitions they have made year-to-date. They’ve obviously deployed a lot of capital and the high level strategic story in each of them seems to make sense. But it’s now up to the team to execute.”
D&D generated $21.9-million in revenue in the first quarter ended Sept. 30, up 29 per cent year-over-year. It lost $15-million, three times higher than a year earlier. But adjusted EBITDA, which analysts watch more closely, was up 41 per cent to $12.5-million.