As private equity investors who have been working with Orad’s highly seasoned management for the past few years on the transformation of the company, we couldn’t be prouder by its recent acquisition by Avid Technology, the world’s leading provider of audio and video technology for media organizations and independent professionals. Here are some of the highlights of our journey, which culminated earlier this month in this exciting news.
As private equity investors we invest in all sorts of companies. Sometimes we invest in growth companies that have a lot of momentum and very strong management teams and other times we invest in companies that require more work to spruce things up. As a fund, we partner with entrepreneurs and leaders to execute whatever transformation plans are necessary. Viola Private Equity’s credo is activist investing, which is basically giving entrepreneurs and management an unfair advantage in growing their business.
Our rationale for investing in Orad
When we first invested in Orad in 2010, a world-leading provider of real-time 3D broadcast graphic, video server solutions, and media asset management (founded in 1993), it was already a public company trading in the Frankfurt Stock Exchange, in our lingo an “orphan stock” (minimum analyst coverage, low trading, and traded at a low price earning ratio).
As part of our strategy at Viola Private Equity, we often look for orphan stock where we think we can change the trajectory of the company. Orad’s public market valuation may have been substantially lower than private market valuation, but where the market saw “orphan stock”, we saw an opportunity, for several reasons: Orad was operating in a growing and vibrant market (broadcasting), it had a great management team and quality products, and although it wasn’t the leader in its category, it was recognized on a global scale. We understood that by working together with Orad’s management, we could help turn it into an even more interesting company.
Our assumption was that broadcasting is not a “dying” area and Orad had a variety of products for different types of channels. The customers valued their products and they were selling internationally (although perhaps in too many markets) including America, China, Russia, Germany etc. When you consider, however, that they were averaging only $30 million in sales, it wasn’t as high as it should have been given their breadth of market coverage, but we believed that the company could refocus their activity and regain significant profitable growth, at which point we might consider taking them out of the Frankfurt Stock Exchange, making them private and maybe launching them again on a different stock market.
2013: A bad year, but also a good year
2013 wasn’t a great year for the broadcasting industry. The market was generally weak and sluggish and stock plummeted severely. Orad was also affected, going from being slightly profitable to losing money, and consequently their shares dropped too. Obviously we all took the drop in revenue very seriously and understood that we need to work together to bring about a massive turnaround.
Many companies during their growth phase – specifically technology companies that have been around for a long time (like Orad) – are required to self-evaluate and transform themselves. They need to scrutinize their product portfolio and identify their growth drivers, or transition from “products” to “solutions”, or expand their global reach and market coverage, strengthen the management team, acquire certain companies to complement or enable growth of existing offerings, etc. In Orad’s case they had too many products, too many geographical markets, R&D budget constraints and a low average revenue per employee in comparison to the hi-tech industry.
Although 2013 was a challenging year for the broadcasting industry, it also presented a potential turning point for Orad. It forced the company to “look in the mirror” and evaluate themselves against industry standards, in order to realize that certain improvements had to happen in order to reach (if not exceed) industry benchmarks. Change isn’t always. It means separating from “old ways” in order to make way for the new. So as private equity investors who have a great deal of experience and expertise as a result of working with many companies that have undergone similar transformations, one of our primary roles is to become this “mirror” for our portfolio companies, and after a series of extensive, spirited discussions, we were able to work together with Orad’s management to establish a solid plan for the changes that needed to be made.
I remember that a few months after we started implementing the changes, seeing more profitability and achieving record bookings quarter after quarter, Avi Sharir, the CEO, described this “terrible year” in retrospect as “one of the best years the company ever had”.
Despite the formidable challenges, it was also the year that provided the opportunity for Orad to finally turn things around.
Avi Sharir, CEO, Orad
The Turnaround Plan
There are several factors that we need to focus on as private equity investors in order to bring a company back to profitable growth. The key areas of the ‘turnaround plan’ that Orad’s management and board decided to focus on were:
1. Management: We decided to strengthen management by hiring additional and senior sales people.
2. Geographical markets: We decided to strengthen sales activity in the US.
3. Realignment of the company resources: We decided to cut our ongoing costs by 15% and realign all spending according to our strategic plan, including re-prioritizing some of our R&D spending on different products.
4. Product offering: We decided to streamline our product offering, streamline the products themselves and adjust R&D investment based on this new product strategy. We also introduced a “solutions” offering that incorporated several of Orad’s products into a single end-to-end solution for a Greenfield broadcasting operation.
Rather than try to compete with the main product offering of the market leader, we realized that not all broadcasting companies need everything, so we chose a few features that were important to a particular subset of the market and decided to focus on offering the best possible solution for them.
Realigning our product offering allowed us to offer a great, competitively-priced solution to mid-sized broadcasting companies while at the same time increasing our ASP because rather than buying one or two products at a time, customers were now buying the full suite of products so we were generating higher revenues. It was also significantly cheaper for the customers because instead of buying individual components separately, Orad’s end-to-end solution meant that they could get all the components they need from one vendor, and we would handle all the associated services as well. Increasing the ‘stickiness’ of Orad’s customers also meant that we would have to change our method of sales and implementation with customers because they were now buying much larger projects from us than they used to before.
Interestingly, in the course of reviewing the product line in order to weed out the poorer performers so we could focus on the growth drivers, we realized that one of the products, which was a Media Asses Management (MAM) software that Orad has acquired a few years earlier, could actually integrate products together into a single suite of products. So even though the company didn’t fully realize the potential of the MAM product at the time of its acquisition, it ended up being transformational for the company.
Changing our product offering repositioned Orad in the market and instead of seeing us as a provider of isolated products, customers were now seeing us as a strategic provider of an end-to-end solution for a full channel.
So in 2013 we did about $30 million in revenue (actually losing about $1.5 million overall), but after completing the execution of all four elements, the company regained profitability in 2014, earning $40 million in revenue with a profit of about $4.5 million. We were achieving record bookings quarter after quarter and landing deals of over a million dollars higher than the previous norm.
2014: A “Consolidation Year” in broadcasting
In parallel to this chapter in Orad’s transformation, a new trend of consolidation emerged in the second half of 2014 with a couple of particularly notable transactions that took place the market. The market leader, which was somewhat comparable to Orad called Vizrt (an Israeli company that was bought by a Norwegian company and had an R&D centre in Israel) was bought by private equity. Another American competitor called Chyron was bought by private equity fund Vector Capital and then later merged with another of its investments, a Swedish company called Hego, so it became known as ChytonHego.
It was obvious that this consolidation phase would continue, and from our perspective the timing couldn’t have been better. We were in the home stretch of achieving Orad’s turnaround and were starting to see traction for profitable growth, so we too were starting to sense some interest in Orad for a potential M&A.
So just as the market consolidation was heating up, Orad went from being an uninteresting orphan stock, to an interesting, profitable company with 20-30% growth and nice margins. People started to take notice and buy up stock, taking it from €1 in 2013 to €4 a year and a half later, leading to an M&A transaction with Avid at €5.6, representing a 40% premium to the stock price.
The financial parameters and KPIs that we were aiming for were set at the beginning of the process, and we knew that if we achieved them, the market would react favorably. And as planned, the perfect execution by Orad’s management of all four elements in our transformation plan, combined with the sharing of information about our progress in a responsible and transparent way with analysts in the stock market, helped the company regain its relevance in the market and increase in value, making it attractive for strategic buyers.
Ultimately, the buyer (Avid) couldn’t have been a better fit for Orad. Orad was attractive to Avid for several reasons. For one thing, they were impressed by Orad’s financial performance. Secondly, they like our customer base, which presents opportunities to upsell their own products, and thirdly, the level of synergy between the two companies is amazing. Unlike M&As where product lines overlap causing all sorts of difficulties, we won’t have to eliminate any of our product offerings, because although Avid are selling around $500-600 million in the broadcasting market and have many products of their own, they don’t have our specific offering. The two companies’ product lines are complementary, and by adding our product offering to their portfolio, it’s likely that if anything, Orad (or now, Avid) will only grow, boosting our Sales team significantly and tripling the size of our development centre in Poland.
All in all the acquisition is a very rewarding outcome for us at Viola Growth, and if all goes according to plan, the two companies both stand to benefit from this exciting union.