SQS Software Quality Systems AG acquires Galmont Consulting LLC

SQS Software Quality Systems AG (AIM:SQS.L), the world's largest specialist supplier of software quality services, announces that it has conditionally agreed to acquire the entire issued share capital of Galmont Consulting LLC ("Galmont"), a leading software testing consultancy in the United States ("US"), for a maximum consideration of $22.0 million. The consideration will be satisfied through a combination of existing cash resources, debt and the issue of up to 1,178,992 new ordinary SQS shares subject to the achievement of certain performance targets during the 36 months after completion.

Galmont is a leading software testing consultancy in the Mid-West region of the US, with a presence in Chicago, Dallas, New York and Kentucky. Galmont complements SQS's existing strength across the Banking, Financial Services and Insurance ('BFSI') and Manufacturing sectors and brings significant new expertise in government and healthcare. For the 12 month period to 31 December 2014, Galmont recorded revenues of $17.1 million and profit before tax of $1.1 million.

Acquisition Rationale

The Acquisition provides SQS with a substantial revenue base, supporting SQS's stated strategy of diversifying its geographic revenue sources by materially enhancing its operations in the US. The combination of existing SQS USA operations, the previously announced acquisition of Trissential and now Galmont will establish a combined US business of $62m in revenues (based on 2014 actuals) covering IT project and programme management consultancy and testing services. Importantly, the Acquisition also complements SQS's existing onsite delivery capability in the US by providing an established and growing nearshore delivery centre in Lexington, Kentucky.

Galmont brings established and valuable relationships across a range of industry groups enabling the larger group to develop new business opportunities for its onshore and offshore testing services. 

Galmont brings with it a strong management team headed by Jeri Smith, Managing Director and Galmont's majority owner. Jeri will continue to lead the Galmont business under SQS's ownership.

Acquisition Consideration

The consideration will be satisfied through a combination of cash and SQS ordinary shares. Under the terms of the Acquisition, SQS will pay the vendors of Galmont an initial consideration of $7.0 million, comprising a cash payment of $3.5 million, to be funded from existing cash resources and an existing credit facility, and $3.5 million payable in shares, equating to the issue of 375,134 Ordinary Shares, based on the average middle market closing price of SQS shares during the 20 business days preceding 25 August 2015 being 598 pence per share (and converted into US dollars at the exchange rate prevailing on each day, being $ 9.33 per SQS share) (the "Reference Share Price").

Earn-out consideration will also be payable dependent on performance as follows:

up to $3 million with respect to performance over the 12 months after the completion date of the Acquisition ("Year 1 Consideration");

and the balance of the earn-out consideration of up to $15m less any amount paid as Year 1 Consideration ("Balance Consideration") will be payable with respect to performance during the 36 months after the completion date of the Acquisition. 

The Year 1 Consideration and the Balance Consideration will be paid within 90 days of the end of the relevant calculation period and satisfied as to 50 per cent in cash and 50 per cent in new SQS shares, the number of which will be calculated using the Reference Share Price.

Application will be made for the initial consideration Shares to be admitted to trading on AIM following completion of the Acquisition. All consideration shares to be issued to the vendors of Galmont in connection with the Acquisition will be subject to orderly market trading provisions that no more than 25% of the consideration shares can be sold in each six month period after the date of receipt, except in the relation to any sale to meet such tax liabilities that may arise in relation to the Acquisition.

It is expected that the Acquisition will complete in September 2015.

Commenting on the Acquisition, Diederik Vos, Chief Executive Officer of SQS, said: "This is SQS's second acquisition in the US and follows the successful integration of US-based management consultancy businessTrissential, announced in April. The acquisition of Galmont, which has built an outstanding and established reputation, significantly expands our presence in this large and growing market for us.

"We warmly welcome Galmont's highly talented team to SQS and look forward to continuing to build upon their client base and excellent reputation as a leading independent software testing consultancy in the US."

Commenting on the Acquisition, Jeri Smith, Founder and Chief Executive Officer of Galmont, said:  
"We are extremely pleased to join SQS at this exciting time for the software testing market in general and SQS in particular. We are looking forward to building on the numerous opportunities ahead and our services offered out of our offices in Chicago, Dallas, New York and Kentucky clearly complement SQS's existing strength across the Banking, Financial Services and Insurance ('BFSI') and Manufacturing sectors, as well as bringing significant new expertise in government and healthcare. "