On January 3, Tangoe (NASDAQ:TNGO) announced that it has received two non-binding acquisition proposals, the first from Marlin Management Company LLC, an affiliate of Marlin Equity Partners, and the second a joint proposal from Clearlake Capital Group, LP and Vector Capital Management, LP. Based on each company’s most recent Schedule 13D SEC filing, Marlin currently owns a 10.4% stake in Tangoe, and Clearlake and Vector own 14.78% and 9.85% of Tangoe’s outstanding common shares, respectively.
Also on January 3, Tangoe announced that it has informed the Nasdaq Stock Market that the company will be unlikely to meet its previously announced deadline of March 10, 2017 for completing its financial restatement process to continue listing its common stock on the Nasdaq market.
In this analysis, Blue Hill examines Tangoe’s announcements and provides guidance to key stakeholders in telecom expense management and managed mobility markets.
Tangoe is the leading global provider of IT Expense Management software solutions, managing over $34 billion in expenses and over 6 million devices per Blue Hill’s December 2016 research. Through its Mobility, Telecom, and IT solutions, Tangoe currently sells to both mid-market companies and large global enterprises seeking a managed services approach to Technology Expense Management.
Tangoe has largely been considered the market leader in this space for the past decade, and has grown inorganically through strategic acquisitions and partnerships that have broadened both Tangoe’s offerings and its reach in terms of enterprise size and geography. These acquisitions and the development of its own in-house offerings have positioned Tangoe as the market leader for TEM, but have also created challenges for Tangoe in supporting a range of distinct software platforms and competing customer demands. As a result, Tangoe has had difficulties with customer retention and for the past few years has faced an increasingly competitive TEM market with smaller more niche players entering and becoming strong competitors focused on a particular region or market segment for deals.
In March of 2016, Blue Hill covered Tangoe’s restatement of financial earnings, an announcement that shortly followed the January announcement of Clearlake Capital taking a significant ownership stake in Tangoe. Since then, these parallel narratives of private equity investment in Tangoe, and Tangoe’s challenge in completing a timely restatement of earnings have been a topic of ongoing concern and interest in the corporate, vendor, and investment communities.
Subsequently, in September 2016, Tangoe announced that the company had received a letter from the Listing Qualifications Department of Nasdaq stating that the staff had determined to delist Tangoe’s securities as a result of the company’s failure to comply with Listing Rule 5250(c)(1). The failure to comply comes after Tangoe’s delays in filing its Annual Report for fiscal year ended December 31, 2015 and Quarterly Reports for the periods ended March 31 and June 30, 2016.
Despite these uncertainties, shares of Tangoe’s stock hit a new 52-week high on August 23, reaching a peak of $9.84 per share. On November 9, 2016, a panel representing Nasdaq determined to continue the listing of Tangoe’s common stock through March 10, 2017, the maximum extension available to the panel under the Nasdaq Listing Rules. As of January 9, 2017, Tangoe’s stock is trading at $8.10 per share.
About Marlin Equity Partners
Marlin Equity Partners is a global investment firm managing over $3 billion in capital with over 100 successfully completed acquisitions across the software and technology, services, healthcare, consumer, and industrial verticals. It currently owns a 10.4% stake in Tangoe based on its most recent Schedule 13D SEC filing. On January 12, 2015, Marlin Equity Partners acquired Telecom Expense Management software provider, Asentinel. Asentinel has since acquired both eMOBUS, in October 2015, and Anatole, in June 2016 to expand Asentinel’s mobility management capabilities and global reach.
As stated in Blue Hill’s recent Global TEM Vendor Landscape, Asentinel is currently a major competitor of Tangoe’s for deals with U.S.-based multinationals. Its recent acquisitions of eMOBUS and Anatole allow Asentinel to further support managed mobility services and global expansion. Since its purchase by Marlin Equity Partners, Asentinel has largely operated as a distinct entity and has continued to pursue strategic opportunities in the TEM space.
About Clearlake Capital Group and Vector Capital Management
Clearlake Capital Group is an investment firm focused on private equity and special situation transactions, managing approximately $3 billion in capital across 70 investments. It currently owns a 14.78% stake in Tangoe based on its most recent Schedule 13D SEC filing. On December 9, 2013, Clearlake Capital Group announced the formation of Calero Software, combining the business operations of Veramark Technologies Inc. and PINNACLE, both providers of telecommunications expense management software, with Movero, a mobility management provider. Calero is now a major competitor of Tangoe’s for Communications Lifecycle Management, particularly for larger Fortune 500 deals, and Blue Hill notes Calero’s advantage for deals with an analytics component.
Vector Capital Management is a private equity firm focused on investing to transform and grow technology businesses, having invested more than $1.6 billion across more than 40 technology companies. It currently owns a 9.85% stake in Tangoe based on its most recent Schedule 13D SEC filing. Blue Hill notes that Vector Capital Management often takes bets by investing to turn around struggling or poorly managed companies with nonstandard finances. In the past, Vector has invested in and turned around SafeNet, a security company facing a similar stock backdating issue to Tangoe, which Vector sold 9 years later for $890 million. In several other short-term investments, Vector purchased and re-sold Teletrac, a fleet tracking company, and Tidel, a retail management vendor, turning around the companies in 3-4 years.
Blue Hill Takeaways and Recommendations
Tangoe’s two acquisition bids are non-binding and the decision is still in the hands of the Board whether Tangoe will accept either proposal. In the short term, Tangoe believes that the bids will not have an impact on the company’s continuing transformation and investments in changing its internal culture and external customer relationships. The market seems uncertain, with Tangoe’s stock price continuing to hover around $8 per share, although Tangoe’s stock faces the very real threat of delisting after the March 10 deadline.
Blue Hill believes that there are several possibilities for Tangoe’s future, and the future of TEM, based on this announcement and on the fact that both Marlin Equity Partners and Clearlake Capital have a significant stake in the TEM space, owning Tangoe’s major competitors Asentinel and Calero, respectively.
1) Clearlake’s TEM contender, Calero, is already a rollup of call accounting, IT management, mobility, and help desk capabilities, meaning that Tangoe would represent an overlay and expansion of capability. For Calero, Tangoe would contribute additional geographic reach and capacity, but also some duplication of capabilities that would end up being removed. Calero’s focus on Six Sigma and process enhancement would also create some culture change for Tangoe as it continues shifting from an entrepreneur-led organization to a more predictable organization.
In addition, because Vector is also part of this scenario, Blue Hill believes that Vector’s experience in managing companies with non-standard financial issues would be valuable in positioning Tangoe over the next several years. With Vector Capital Management’s past investment history, Blue Hill sees the company as the best fit for acquiring Tangoe as a long-term investment opportunity, rather than a take-private or consolidation scheme. Vector has in the past made bets on non-traditional technology companies, and with Tangoe’s current financial reporting struggles and its internal transformation underway, it seems like a fit for Vector’s investment criteria.
2) Marlin’s TEM contender, Asentinel, has acquired eMOBUS as a mid-market managed mobility provider and, with its Anatole acquisition, has a strong European operational and sales foothold. Tangoe would provide additional AsiaPac, help desk, logistics, and professional services capabilities. Although both Calero and Asentinel would greatly increase their sales and marketing capabilities through a potential Tangoe acquisition or merger, Asentinel would have more roles to fill in supporting a company with the combined revenue of a current TEM provider + Tangoe.
3) With the threat of delisting, another potential outcome would be a bidder purchasing Tangoe before the delisting, taking the company private, and profiting at the expense of investors by taking Tangoe back apart into constituent pieces. This is a much bleaker future for Tangoe that would largely undo the ambitious rollup that has taken place over the past decade and which Blue Hill hopes will not come to light.
Whatever the outcome of the acquisition bids, Blue Hill notes that the announcement demonstrates that Tangoe’s transformation efforts reflect a noted change in the TEM market. The enterprise market is increasingly favoring specialized and high-touch managed services TEM solutions, and big TEM players must provide the agility to better deliver a high-touch degree of customer service and highly customized software offerings tailored to a specific client’s needs. Regardless of whether Tangoe is taken private or remains public, Blue Hill believes that Tangoe is going through a necessary stage to rationalize its solutions rollup and create a more mature company that is competitive in the telecom expense and managed mobility markets.
Tangoe’s prior “whatever you need” approach by consolidating many unique TEM platforms and service solutions into its offering has resulted in significant customer support and implementation challenges that Tangoe is now addressing in earnest. Blue Hill cautions that Marlin and Clearlake should be aware of these challenges and continue Tangoe’s improvements and consolidations in the event of an acquisition. At Blue Hill, we will continue to keep our eye on Tangoe and the TEM market, which may be facing some serious disruption going forward based on the uncertain future of its market leader.