Agilysys Hires JPMorgan for Possible Sale

Published: June 23, 2008

by Timothy Prickett Morgan

In a vaguely worded statement released by server reseller and application software provider Agilysys, which has a substantial presence in the i ecosystem, the company indicated that it might be putting itself up for sale. The company, which is based in Boca Raton, Florida, has also deferred its annual meeting until the bankers at JPMorgan Chase finish up doing the financial analysis and laying out a strategy for the company.

On June 16, the board of directors at Agilysys released a statement that said they had voted to expand the advisory role of JPMorgan Chase to work with the company's managers to "to explore a range of strategic and financial alternatives to enhance shareholder value," including but not limited to staying the course on the current strategy at the company (which involves acquisitions and organic growth and a move away from hardware distribution and application solution selling), selling assets or the entire company, forming joint ventures with other players in the IT space, and otherwise changing the capital structure of the company. JPMorgan Chase has been an advisor as Agilysys has done lots of acquisitions and sold off parts of its business, and was re-engaged to take a look at the company's strategy on May 13. On June 16, all options were put on the table, and the bankers were given the task of examining all options.

"Given recent developments in our markets and the current macroeconomic environment, we have expanded the process to further evaluate all strategic options available to us to appropriately maximize the creation of long-term shareholder value," explained Arthur Rhein, chairman, president, and chief executive officer at Agilysys, which has just under 1,000 employees.

The stock market has rarely been kind to midrange application software providers, and this seems to be one of the things that is weighing down on the managers and investors of Agilysys, the latter of which includes some private equity firms who are probably feeling a lot of pressure these days. As we go to press on Friday, Agilysys had a market capitalization of $287.7 million, which is nothing to shake a stick at, but when you consider that the company's sales have grown by 64.6 percent in fiscal 2008 ended March 31 to hit $781 million, that seems like a pretty stingy valuation indeed.

But there's a reason for this. Agilysys sold its KeyLink Systems server and storage hardware distribution business to Arrow Electronics in January 2007 for $485 million--a business that generated approximately $1.6 billion in revenues in calendar 2006 for Agilysys but which did not contribute profits. This was a good move, particularly for the cash. But after reclassifying its financials to remove KeyLink, you can see that Agilysys has been losing money in fiscal years 2005 through 2008, even as it grew revenues. The company had $377 million in sales in fiscal 2005, but had an operating loss of $24.1 million. The cash from the sale of KeyLink helped out bigtime in fiscal 2007, of course, but the company had an operating loss of $16.4 million in fiscal 2008 on $797.4 million in sales, but made money on other investments and managed to post a net income of $7.2 million. Back in fiscal 2004, when it was still a hardware reseller, the company had $1.4 billion in sales and brought $14.1 million to the bottom line--still pretty skinny margins.

And the company is not sitting on a lot of cash, either, with only $70.6 million in the bank as the fiscal 2008 year ended in March. All that dough that came in from the sale of KeyLink was booked as income and was presumably used to pay dividends and pay for the acquisitions that drove revenue growth in Agilysys' application software business. Last year, Agilysys bought Visual One Systems, a maker of Windows-based applications for the hospitality industry, which has annual sales in the range of $9 million; Stack Computer, a technology integrator that has $55 million in sales a year and that puts together high availability storage setups using gear from EMC and Cisco Systems; InfoGenesis, which has software for running hotels and casinos and which brings in about $42 million a year; and Innovativ, which has around $256 million in annual sales peddling Sun servers and storage to end users.

Agilysys informed the Securities and Exchange Commission that it has delayed its annual 10-K report until July 1, and said that it would be postponing its annual meeting, scheduled for August 1, until after the JPMorgan Chase review is done.

In early June, Agilysys reported preliminary financial results for the fourth quarter and full fiscal 2008 year, and said that its Technology Solutions Group, which sells software and servers, had sales of $557.4 million in fiscal 2008, up 62.3 percent, growth that came thanks in large part to the Innovativ and Stack acquisitions. Agilysys said that sales in the North America region grew by more than 10 percent in the first nine months of fiscal 2008, but fell by 17 percent in the final 13 weeks of the fiscal year, and this made growth for the year drop to an anemic 1.4 percent for the Technology Solutions Group. Surprisingly, Agilysys said that sales in the TSG unit fell by 50 percent in China in the final quarter. These numbers may be leading indicators for economic turbulence, or they might just be some hesitant midrange shops hoping to get better visibility into 2008 before they commit to IT projects.

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