February 6, 2018 — The hot rumor late Friday afternoon has the Carlyle Group and Silver Lake closing in on an acquisition of CDK Global. Company shares jumped in after hours trading Friday night on the news from $66 to $73 so the rumors likely have some teeth.
It is possible a deal might not happen. (The Banks Report provides an in depth analysis of the potential deal in its 2017 Automotive Retail Vendor M&A Report). It will be more than $10 billion — more likely between $11 billion and $12 billion when factoring in the debt. It’s a big number that rules out any strategic buyer and makes most banks looking to provide debt financing for the deal queasy.
CDK is one of the leading tech firms supplying dealer management and software services to car dealers. It generates more than $2.2 billion a year in annual revenue.
The other two big players are Reynolds and Reynolds and Cox Automotive — both of whom are privately held.
If CDK is taken private, the three largest vendors of automotive retail technology will be private which means the only information available to the industry will be mainly press release fodder. That’s not to say none of that information is valuable (for the record, the communications teams at all three companies do phenomenal work and are a great asset to our industry).
But data from public companies often is more substantive from an informational and business intelligence perspective.
We’ll lose that if all three companies are private.
Granted, my world and livelihood is based on getting information, analyzing it and providing it to the subscribers of The Banks Report. So, yes, it will impact me more than it will others — at least on the surface.
But that information is valuable to dealers who are trying to determine which vendor partners to select. It gives us a window into what’s happening now and what likely will happen in the future. And it’s valuable to other vendors who are making strategic decisions about their future. It’s also critical information for investors — data from acquisitions a public company makes helps investors establish more intelligent valuations.
When a company is public, they have to disclose all types of information. For example, when the Federal Trade Commission began an investigation into an agreement CDK and Reynolds and Reynolds signed in 2015, CDK had to disclose that — along with information about the antitrust lawsuits filed against it — to its shareholders. Reynolds didn’t because it’s a privately held company.
Furthermore, there is financial information and other data public companies have to provide that gives us a window into what is happening overall in the industry.
If CDK goes private, getting that information will be much more difficult — and it won’t be forthcoming from the other two vendors. I’m not sure that’s a good development for the industry. I would prefer all three be public, but I’ll take what I can get. At least with one company public, we have a better idea of what questions to ask and can often triangulate conclusions using other pieces of information.
You can make the argument CDK will be better off private having the freedom to pursue long strategic initiatives rather than have to cater to investor and analyst demands for quarterly returns. And, as a result, that will ultimately be better for its dealers. There is some truth to that, but in this situation, the demands on a private CDK may be more than it currently has as a public company — even with the activist investor it has now.
CDK, as its own public company (formerly ADP’s Dealer Services Group before it was spun off in 2014) has been a win for investors as the stock price has gone up from $25 to more than $70 in less than three years. The company has become financially healthier as Brian MacDonald and team have executed a well-put together transformation plan. But it has been a mixed-bag for dealers. CDK has launched a stronger and more effective website platform; acquired a DMS-reporting tool and initiated a strategic play inviting more vendors to be part of its platform. But, it also executed a controversial and more costly (for third party vendors) data integration policy. And late last year, it began tightening up its contracts with dealers and no longer allow dealers to fall into a month-to-month situation (while tougher for dealers, it is smarter for CDK financially and strategically to tighten these areas).
If it’s acquired (and it is sounding like a deal may be close) the new P/E owners are going to demand significant growth. There are going to be additional cuts and restructuring as well as acquisitions. And unless the FTC comes down hard on Reynolds and CDK, the industry is not going to get a more open and less expensive data integration play from either DMS. The lawsuits will take another couple of years — if not longer — to play out, if they aren’t settled first.
I don’t want to overstate the issue, but I’m not looking forward to the day CDK is sold. I’ll have to find something else to do on Saturday morning other than reading its SEC filings.
NOTE: I first published a version of this blog on LinkedIn. Click Here to see it and the ensuing discussion in the comments section.