NelsonHall recently caught up with the management of SQS to discuss its recent acquisitions and its plans in North America. SQS has this month completed the acquisition of Trissential, a U.S.-based firm operating in the Mid-West, with headquarters in Chicago. The company had 2014 revenues of $32.3m, a PBT of $1.6m, and headcount of 130.

Why Trissential?

Unlike its two previous acquisitions (Bit Media in Italy and Thinksoft Global Services in India, both software testing services companies), Trissential is a consulting firm providing program and project management services to help CIOs manage their IT contracts. The company specializes in JD Edwards, ERP and SCM contracts, and has developed several IPs around JDE.

SQS’ strategy is to mirror what it did in 2007 with the acquisition of Triton in Austria, a management consulting firm involved in business process reengineering and project/program management services. Triton (now SQS Management Consulting) has continued operating as a separate unit, and its revenues have doubled to ~€12m between 2007 and 2014. More importantly, Triton has built from scratch the revenues that SQS now derives from the insurance sector (NelsonHall estimate in 2014: €43m).

Hence, SQS is seeking to replicate this success with Trissential. Like Triton, Trissential has software testing needs that it previously sourced from third party organizations and will now be sourced from SQS.

Because of its track record with Triton, the signs are good. SQS also has very little presence in the U.S. (~€12m in 2014), with no overlap in clients, and this should help the integration process and cross-selling opportunities.

Update on the Bit Media Acquisition

SQS closed the acquisition of Bit Media on February 1, 2015 and named the company to SQS Italia S.p.a.

SQS Italia provides software testing and QA services to Italian clients, especially in the public sector and financial services. It provides mostly on-site services and specializes in functional and integration testing. The company had 2013 revenues of €11.5m (NelsonHall estimate for 2014: ~€12m). It is highly profitable (PBT of €1.1m) but with low-growth (low single digits per year, as per NelsonHall estimate). More details here.

An interesting characteristic of Bit Media is that it has a huge backlog of services (~€33m), corresponding to a little bit less than three years of revenues. This is due to the company’s client base in the Italian public sector, with which it has contracted long-term engagements.

SQS has also highlighted:

• It wants to continue developing its presence in Europe
• The similarities between the German and Italian markets, with their structure of SMBs in the manufacturing sector. SQS is hoping to replicate its success in its domestic market in Italy
• Bit Media is complementary to SQS, as SQS did not have any legal entity presence in Italy
• The timing of the acquisition was important, with valuations still reasonable and a re-acceleration in GDP growth after difficult years.

Looking ahead, SQS wants to grow SQS Italia in the private sector, particularly with MNCs in financial services, and is investing in sales activity locally. SQS is expecting first revenue synergies in the next six to nine months.

The Year Ahead: U.S. Again

The Bit Media and Trisstential acquisitions were unexpected moves (in terms of geography for Bit Media; and in terms of services mix for Trissential).

What is interesting, however, is that even after the two transactions, SQS has moderate net debt: NelsonHall estimates that at this point SQS has a net debt of €6m (based on 2014-end financial information and the cash payments for Bit Media and Trissential).

In short, the Trissential deal is not the last M&A move for SQS this year. The company highlights that if it makes another acquisition in 2015, it will again be in the U.S. It has even instructed the financial community that it will have a (limited) net debt at the end of 2015 as a result of acquisitions.

SQS has not given a lot of detail regarding its next target, but from the discussion, the acquisition will be more of a traditional testing services firm with an onshore factory capability to service clients in the government and defense sectors.

SQS has announced that it wants to eventually derive 50% of its revenues from North America. And with Trissential, the company is roughly half-way towards its mid-term objective of €100m in revenues (NelsonHall estimate: ~€43m in 2014 pro-forma revenues).

SQS is currently servicing a number of banking and financial services clients from India, several manufacturing clients (automotive, Siemens PLM), and now has onshore presence in the U.S. Mid-West. So, while we can expect to see more M&A activity from SQS, there also remains ample potential for organic growth.