M&A deals a sure sign of brewing confidence

You know the cliches. “Canary in a coal mine”. “A Robin is the first harbinger of Spring.”

Since we’re in “tea leaf reading” mode here (see prior post “Finding a floor” August 4-09), the news is timely that Wellington Financial Fund II portfolio co. CriticalControl Solutions (CCZ:TSX) completed a meaningful tuckunder acquisition on Monday. When small cap CEOs start to acquire companies again, you have a good sense that they are seeing comforting signs in their own economic ecosystem.

And that should be good for the rest of us.

CCZ had a run rate of about $25 million in revenue (using Q1 2009 figures), and earned 2 cents a share in its most recent quarter. Adding $11 million of BPO’s revenue will be a true game-changer for the company.

This is from a story in the Winnipeg Free Press:

Its first move was to fire three senior managers, but the new owner of a Winnipeg-based imaging and information management firm says the long-term goal is to nearly double the workforce here. Calgary-based CriticalControl Solutions Corp. announced Tuesday it has purchased the Canadian operations of BPO Management Services, Inc., of Anaheim. Calif., for $2.4 million.

The Canadian operations, which went by the name BPO Management Services, Ltd., were headquartered in Winnipeg, but also had an office in Toronto.

CriticalControl president and CEO Alykhan Mamdani confirmed in an interview that BPO’s top three managers in Winnipeg were let go as soon as the deal closed on Monday.

He said the company was losing money and wasn’t financially viable, “so immediately that will mean a change in management.”

BPO Management Services, Ltd. employed 85 people in the two offices, including about 60 in Winnipeg.

Mamdani said there are no plans to dismiss more workers. On the contrary, the goal is to add more over the next few years.

“We see Manitoba leading the country in (economic) growth over the next 18 to 24 months,” he said. “So we see the Winnipeg operations expanding to close to 100 people over the next three to five years.”

Mamdani said the Canadian operation’s biggest problem was that it didn’t have enough operating capital to enable it to grow.

“The strategy of the company was sound and very similar to ours,” he said. “We feel with our balance sheet, we can provide the strength it needs… We are very sound financially.”

BPO and CriticalControl both specialize in providing imaging and information management services for other organizations. That typically means developing a plan for how their internal information should flow, setting up an information management system, and then operating the system on behalf of the customer.

CriticalControl’s customers in Alberta are government departments and organizations, while BPO’s clients in Manitoba are a combination of government departments and private-sector firms.

CriticalControl said about 40 per cent of BPO’s yearly revenues are generated from its Winnipeg-based imaging and enterprise content management services. The rest come from the sale of imaging equipment and third-party maintenance contracts across Canada.

It said BPO reported $5.8 million in revenue for the six months ended June 30, and an operating loss of $500,000.

BPO’s Canadian operations were formed in 2005 when the U.S. parent company acquired two Winnipeg firms — ADAPSYS Document Management and Deines Imaging. The following year it acquired a third Winnipeg company — NOVUS Imaging Solutions — and in 2007 it purchased DocuCom Imaging Solutions of Concord, Ont.

Mamdani said the BPO acquisition enables CriticalControl to expand into other parts of the country and “to reduce our concentration risk to the Alberta economy.”

MRM
(disclosure – our Fund II owns shares and warrants in CCZ)