Fortitude Ltd Fortitude Largest Software Company in New Zealand

Assignment Task

The acquiring company

Fortitude Ltd (Fortitude) is one of New Zealand’s largest software companies. Founded in 2004, the company has a long history of successful acquisitions in the New Zealand market. It has an experienced Mergers & Acquisitions (M&A) team led by Fortitude’s Chief Financial Officer (CFO)

One of the pillars of Fortitude’s strategic plan is to expand in the Australian software market by acquiring niche players that have a good fit with its business portfolio. The acquisition of an Australian company called AddExcel Software Pty Ltd (AddExcel) presents an interesting opportunity to Fortitude.

The takeover company

AddExcel is a software company that was founded by Alana Smith in 2014. As a skilled programmer, Alana saw her chance to develop add-ins for Microsoft Excel (Excel). Over the years, AddExcel has grown from a home-based start-up to a global leader in the niche market of Excel add-ins for financial and risk analysis. Its flagship products are AddExcelFinance and AddExcelRisk. In 2023, the company had a turnover of around A$17.3 million and employed 53 staff. In most regions, notably North America and Europe, AddExcel sells and distributes its products under a subscription-based software as a service (SaaS) model via a multilingual website. It also has partnerships with software vendors in Asian countries. A dedicated team in AddExcel’s Melbourne office deals directly with enterprise clients (such as large multinational financial institutions, accounting and consulting firms).

Alana is AddExcel’s sole shareholder and Chief Executive Officer (CEO). Apart from her CEO salary, she receives an annual dividend income from the company. AddExcel has no debt on its balance sheet.

AddExcel’s business model

AddExcel has a technical team of software programmers and other IT specialists who work on internal development projects. Internal research and development (R&D) is necessary to improve existing products and to upgrade to new technologies. For example, new versions of AddExcel’s subscription-based products are released at least once a year. Internal software development is a critical driver of future sales. Hence, to ensure that products remain competitive and to underpin continuing sales growth, AddExcel will have to make significant investments in internal software development.

The challenge

Alana believes that the company is at a crossroads. To continue in its present independent form, AddExcel must invest heavily in generative artificial intelligence (gen AI) technologies but funding these investments from the operating cash flow looks challenging. Attracting additional external financing has also proven difficult as banks and equity investors have little appetite for risk. Therefore, Alana is eager to explore the potential sale of her business to Fortitude.

Acquisition process After signing a confidentiality agreement, in April 2024, the two companies start takeover discussions. Fortitude’s M&A team prepares a financial model to value AddExcel by calculating the business’s net present value (NPV). Since AddExcel has no debt, the NPV will determine how much Fortitude would offer for Alana’s shares, assuming due diligence proves satisfactory.

Task

1. Review the financial model

a. Recommend an action to resolve each of the four (4) issues that Fortitude’s CFO outlined in their email

b. Assess the potential impact on the valuation of each of the four (4) issues that Fortitude’s CFO outlined in their email.

c. Explain four (4) other issues with the model’s structure, logic and integrity. These can include key business drivers, key assumptions, navigation, hidden areas, separation of inputs, calculations, results from error checking, output that matches the model’s purpose, results of interrogating formulas, results of a stress test, links to other workbooks, hard-coded numbers, and calculation setting checks.

d. Recommend an action to resolve each of the four (4) issues under Task.

e. Assess the potential impact on the valuation of each of the four (4) issues under.

2. build a three-way forecast model

After reading your reply to his email, the CFO has asked you to build a three-way forecast model for the years 2024– 2028 (Y1–Y5). Fortitude’s M&A team will then use your three-way forecast model to make a more accurate calculation of AddExcel’s NPV.

Meanwhile, as part of the due diligence investigation, Alana has provided the following information from AddExcel (actuals for 2021–2023; budget for 2024):

• Extract of management accounts with annual income statements and balance sheets.
• Details of sales of subscriptions, sales of licences and sales to enterprise clients.
• Details of cost of sales.
• Overview of full-time equivalent (FTE) staff.

3. demonstrate the financial model

Fortitude’s management team has asked you to present the workings of your financial model in a short video.

Create a video of no more than three (3) minutes to demonstrate the workings of your financial model to Fortitude’s management team. The video demonstration should show your face on camera and include the following elements:

a. Brief explanation of the structure of the model, identifying the inputs, calculations and outputs.

b. Demonstration that the balance sheet balances.

c. Demonstrate that checks have been included to ensure reconciliation between the tabs.

d. Explanation of how the sensitivity analysis works by showing your data table from the ‘NPV sensitivity analysis.

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