Introduction
Upon recent news, Insight Enterprises acquired SADA in an acquisition of $410 million, with a potential additional earnout of up to $390 million for SADA's owners.
Insight is a publicly traded global technology company, based in Arizona, specializing in business-to-business and information technology (IT) solutions for enterprises. Think IBM but on a smaller scale, and with a narrower focus on IT solutions integration, cloud services, and digital transformation consulting. As a Fortune 500 company, Insight operates in 19 countries and offers products and services like data centers, devices, servers, software, licensing, power, storage, and IT services.
SADA is a renowned cloud business and technology consultancy firm, recognized for its expertise in Google Cloud solutions. Being a Google Cloud Premier Partner, SADA offers deep engineering capabilities across the Google Cloud stack and specializes in a range of services including security, infrastructure, cloud migration, data analytics, application development, location intelligence, and machine learning. The company has been awarded the Google Cloud Partner of the Year multiple times, reflecting its proficiency and success in implementing Google Cloud technologies for its clients.
In this article, the M&A transaction will be viewed through 5 main touchpoints.
The Rationale
The basic premise of the transaction was for Insight Enterprises to up its generative AI capabilities by acquiring an established "Google Superstar," SADA.
Effectively, the deal encompassed Insight, No. 16 on the 2023 CRN (The Channel Company) Solution Provider 500 with a multibillion-dollar relationship with Microsoft, with SADA, a Google Cloud Premier partner, No. 108 on the 2023 CRN Solution Provider 500 with approximately 850 professionals focused on Google Cloud.
As the interest of clients in generative AI solutions grows, the combination of Insight's strength with Microsoft Azure and SADA's strength with GCP (Google Cloud Platform), positions them as a top partner in the two leading GenAI platforms.
SADA delivered a net revenue of $251 million in 2022 and a gross profit of $200 million.
Insight, being one of the top 1% of all Microsoft solution providers globally, stated that this deal puts it in the same class as Accenture and Deloitte. The latter two are also the biggest cloud players for Microsoft and Google. With this deal, Insight garners additional expertise in data, AI security, and intelligent edge solutions across the top hyper scalers - Microsoft Azure, Google Cloud, and Amazon Web Services. As over 75% of enterprises utilize a multi-cloud strategy, this deal effectively "cements" Insight as one of the top "preferred partners" across both Microsoft and Google Cloud.
Together, Insight and SADA will have more than 6,400 skilled, certified consulting and service delivery professionals with a majority focused on developing multi-cloud and digital transformation solutions.
SADA has 10 Google Cloud Specializations such as security, infrastructure, cloud migration, data analytics, application development, location intelligence, and machine learning. Meanwhile, Insight has 22 Microsoft specializations with more than 65 Microsoft Partner of the Year awards.
Finally, this acquisition advanced Insight's strategy to become the leading solutions integrator and further strengthen its position as a multi-cloud solutions provider, adding both scale and expertise, while enhancing its services profitability.
The Deal
To recap, Insight said it paid $410 million for SADA with a potential additional earnout of up to $390 million to acquire SADA. The additional earnout for SADA owners has a target of $210 million based on SADA’s three-year performance post-close of the acquisition, according to Insight.
Insight predicts that the deal will add 20 to 30 cents per share to its adjusted diluted earnings per share in December 2023 and 55 to 75 cents per share in 2024.
This deal was funded through cash on hand along with an asset-based lending revolving credit facility.
Insight's CFO Glynis Bryan said there is a $27 million incremental interest expense that will be incurred over the first year under current borrowing rates.
Meanwhile, SADA will contribute between $50 million and $60 million in EBITDA and between 55 and 75 cents to adjusted diluted earnings per share in 2024.
Because of the nature of seasonal client renewals, SADA historically has generated low to negative EBITDA in the first half of the year and significantly improved EBITDA in the second half of the year. Particularly in the fourth quarter, driven by client renewals.
With its consolidated fourth-quarter and full-year 2023 financial results, Insight said it will incorporate SADA's December financial figures.
Anticipating a profit growth in the low to mid-single-digit range, the company said its adjusted earnings per share for the year will be $9.60 to $9.90.
To conclude this part, Insight's Bryan said how they are thrilled about the value they can deliver to clients through the combined strengths of Insight and SADA.
“We remain focused on the fastest-growing areas of the market and we believe this acquisition brings us one step closer on our journey to becoming the leading solutions integrator,” said Bryan.
SADA's Comparative Advantage
The first thing that needs to be said, SADA provides Insight with robust Google Cloud capabilities.
Having delivered a net revenue of $251 million in 2022 and a gross profit of $200 million, SADA is one of the largest Google Cloud partners in the world with 850 employees.
Los Angeles-based SADA, which is exclusively focused on Google Cloud, has a customer base of 3000 companies. Having such a large network of business clients, it has a global footprint with employees in the U.S., Canada, U.K., Ireland, Armenia, and India with 400 engineers and technical experts.
As mentioned, and worth reiterating, SADA has 10 Google Cloud specializations. Insight Enterprise President and CEO Joyce Mullen points to a significant opportunity for SADA to bring synergies for even stronger GCP (Google Cloud Platform) skills to Insight's existing client base.
SADA provides deep capabilities across the Google Cloud Platform, Google Workspace, security, data, and generative AI, according to Insight.
Likewise, SADA's strengths in multiple industry verticals including health care, life sciences, technology, financial services, and retail, shouldn't be overshadowed.
The Intricacies of the Deal
Having decided it was time for sale, SADA hired an investment banker who went through a process of carefully curating potentially interested acquirers. "Insight had a relationship with the leadership of the SADA team, however, it was a combination of the auction process as well as maybe SADA knowing a little bit more about Insight that led to the successful conclusion of this project," said Insight's CFO Bryan.
Essentially, Insight viewed SADA as a "family business" that was interested in monetizing the business with a sale holding a good market value that cloud platforms and GenAI bring to the table.
It's worth mentioning that SADA "goes back" to 1987 when it was founded by the Safoian family, Hovig Safoian, and his wife, Annie, who emigrated to Los Angeles from Armenia in 1987.
For SADA's owners, it was an opportune time, if you will, to exit. "There are no structural issues," Bryan said.
The Financials
According to Insight's Bryan, here are the following figures.
SADA's Google Cloud contracts typically range from 3 to 5 years with, as mentioned, "significant seasonality" related to a concentration of client renewals in the fourth quarter, with December being the strongest month of the year.
Based on the current terms of the contracts, SADA is acting as an “agent” with revenue and gross profit recognized “up front on a net basis."
Associated assets and liabilities for the full-service amount not yet consumed are recorded on the balance sheet and are released over the contract term based on the customer’s actual consumption. This increased Insight’s total assets and total liabilities of over $2 billion.
In regards to SADA's clients and contract churn, SADA's clients commit to the GCP agreements for whatever the term is, 3 or 5 years. If a client were to leave, it is still obligated by the contract, it cannot "walk away." So, the issue around the churn is more limited.
Having looked at SADA's client satisfaction and renewal rates, Insight is very satisfied. After all, one does not become Google Partner of the Year "by accident," as SADA has continually been throughout the past years.
SADA's Leadership and What's Next
The top executive team of SADA, including its CEO Tony Safoian, will remain with the company.
According to Insight's President and CEO Joyce Mullen, the potential additional earnout of up to $390 million for SADA’s owners was designed to keep the management team in place.
The earnout provision was designed for the management team to "stay around for a while," according to Mullen, "and we are very excited about that," she continues.
Insight effectively plans to have SADA run independently. "There might be some cost synergies in the future, but in the near term we plan to have SADA run independently," Bryan says.
Since the SADA payout includes a management plan, Insight is holding the SADA management team accountable for that. Discussions were held about what the companies' management teams think is going to happen in the first year, 2024 to be exact.
"There is always a little bit of noise when two companies come together. I think our cultures are an incredible match. We here are very excited about what SADA can do for us," Insight's Bryan concludes.