Venture Capitalist Thoma Cressey Acquires Vision Solutions

Here’s a story that the i5/OS and OS/400 community didn’t hear in two decades of history, but which in the past year has happened more than a few times. Another prominent player in the community has been acquired by a prominent venture capitalist. In this case, late last week, Vision Solutions, which is owned by a holding company from South Africa called Idion Technology Holdings, said that it was going to be acquired by Thoma Cressey Equity Partners.

The deal, which has been approved by the Idion board of directors and which will presumably be approved by the Idion shareholders on the Johannesburg Stock Exchange (JSE), values Vision Solutions at between $62.5 million and $63.5 million. Thoma Cressey manages seven private equity funds, which invest in a number of healthcare, information technology, and business services companies. The venture capitalist manages around $2 billion in equity capital, and has been in business for 26 years. The fund that is acquiring Vision Solutions is called IS Holdings, which is a Delaware corporation that is 100 percent owned by Thoma Cressey.

Everyone knew something was up when Idion put out what is called a cautionary announcement on June 26, saying that discussions were under way that might have a material impact on its stock. On August 3, it put out a statement saying that discussions were still under way. And then on August 16, the company put out what is called a trading statement. A trading statement is a document that the JSE requires whenever company results differ by at least 20 percent from those in the prior year. In that trading statement, Idion said that its losses in the first half of 2006 would be in the range of 0.6 cents to 0.8 cents a share for the first half of 2006, significantly less than the 1 cent a share loss it posted in the first half of 2005. Idion reported its interim results for the first half of 2006 on August 23, saying that license, services, and maintenance sales all increased and that license sales grew by 22 percent compared to the first half of 2005. The company also said that it had a loss of $777,000, which is better than the $1.1 million loss it had in the year-ago period. (Idion did not provide revenue figures in the report.) Obviously, the deal with Thoma Cressey was what Idion was talking about in the cautionary statements, and that venture capitalist acquired Vision Solutions even though it was apparently going to post significantly higher losses than a year ago.

The scuttlebutt out there in the i5/OS and OS/400 community as Idion was making these statements was that perhaps one of the other high availability software players might try to acquire Vision Solutions. But it is safe to say that few would have predicted that Thoma Cressey was the buyer.

Vision Solutions, which is headquartered in Irvine, California, is itself a 100 percent owned subsidiary of Idion. That South African company acquired a high availability software provider called Silverlake Technology Solutions in 1999, which created a high availability software product called CATS. (CATS was actually licensed by Vision Solutions’ rival, Lakeview Technology, for a number of years as a part of its own high availability software). But Idion became no more than a holding company, with just five employees, since it acquired Vision Solutions for $54.5 million in March 2000. In February 2005, Vision Solutions acquired a British-based high availability and data replication software provider called OS Solutions to bolster its product lines.

After that acquisition, Vision Solutions had more than 2,000 customers and more than 12,000 software licenses for its various high availability, data replication, and systems management software, which runs on i5/OS and OS/400, Windows, AIX, and Linux. The company has 200 employees, and all of them have been retained as part of the acquisition by Thoma Cressey. Nicolas Vlok, who is managing director of Idion and chief executive officer of Vision Solutions, will stay on in that role and run the unit for Thoma Cressey.

The Idion shareholders will almost certainly approve the deal, since prior to the announcement, Idion’s market capitalization was around $22 million, based on the prevailing exchange rates between the U.S. dollar and the South African rand. So the striking price for Vision Solutions is about the same as the buy price that was initially announced in March 2008 (but higher than the final $54.5 million price Idion actually paid), and is a factor of 2.8 times the current market valuation for the company. Idion’s financial filings for its 2005 year end, show that it had sales of $33.25 million last year. The company spent $2.73 million on acquisitions in 2005 (presumably all of that was for OS Solutions), and at the end of the first half of 2006, it had $7.4 million in net cash and no third-party debt. It is unclear whether this cash goes to Thoma Cressey as the acquirer of Vision Solutions or to Idion’s shareholders. Vlok said that Idion will be wound down and delisted from the Johannesburg Stock Exchange as part of the deal and that around $63 million will be distributed to shareholders. This would seem to imply that Thoma Cressey will keep whatever cash was in the bank at the time at Idion. Obviously, that cash diminishes how much the venture capitalist really paid for Vision Solutions.

Idion’s management holds approximately 40 percent of that holding company’s shares, by the way, with a number of investors holding other big pieces after they helped Idion fight a hostile takeover from rival DataMirror in 2002.

While Vision Solutions has expanded beyond its OS/400 and i5/OS roots to embrace all of the platforms that are now incorporated into iSeries and i5 systems–Windows, Linux, and AIX–its sales are still dominated by the OS/400 and i5/OS platform. According to Vlok, about 80 percent of Vision Solutions’ revenues come from sales of products into the OS/400 and i5/OS market.

Vlok believes Idion has been undervalued by the Johannesburg Stock Exchange, which lists only two software companies and is not exactly a center of tech investing. Because the Johannesburg Stock Exchange was not keen on high tech stocks and was even less likely to give Idion the money to make key strategic acquisitions or fund geographic expansion. And so, a team of executives worked with Silicon Valley Bank to drum up a list of potential suitors in the venture capital community, and Thoma Cressey came out on top.

Only two weeks ago, Thoma Cressey spent $234 million to acquire Embarcadero Technologies, which sells database administration and security tools for mainframe, Windows, Unix, and Linux platforms. Thoma Cressey is also one of the investors in JDA Software and in Attachmate (which bought rival WRQ and security expert NetIQ in the past year and which is now also a private company). Many years ago, Thoma Cressey acquired an ERP company called Prophet21, which sold OS/400, Windows, and Unix applications, and after investing in it and shoring up its products and marketing, sold it off to another software house.

The point is, Thoma Cressey is one of the few big venture capitalists that is not afraid to invest in the i5/OS and OS/400 platform. In fact, if Vlok’s hints are any indication, we can expect to see more such acquisitions.

“We are really going to dictate the pace in the market,” boasts Vlok. “As I have explained to Vision employees, when you bring innovation and talent together, and you combine that with capital, you see magic start to happen. We feel that the System i market is very large and very underserved, and when we explained this to Thoma Cressey, they got excited by the System i, too.”

After the deal closes, which is expected to happen around October 31, Vlok and Thoma Cressey will start plotting a course that will see Vision Solutions do more marketing and promotions for its products and help it expand its operations on a geographical basis. Vlok says that he is interested in building a much broader product portfolio, and that acquisitions could be a part of that.

“The System i business is not just about high availability,” Vlok explained. “We think that the infrastructure software space is pretty fragmented, and there is a lot of opportunity.”

So, it would seem that Vlok is not much interested in launching a hostile takeover for DataMirror. But Vision Solutions, with capital from Thoma Cressey, could start snapping up all kinds of software companies in the System i space and offer a truly integrated stack, from iron to screen.

It is an intriguing possibility.

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Correction: This story has changed since it was originally published. While Idion did not post its interim results for the first half of 2006 on its site, or in any place IT Jungle could find on the Web, it did, in fact, report those results to the Johannesburg Stock Exchange. We have added this information to the story. [Corrected 09/25/2006]