Moreover, the rapid pace of technological change the industry is facing provides strong growth opportunities. Should TeamSystem be proactive and take a leading role in the adoption of new technologies, they can steal market share from slower competitors. That they need to do an overhaul on many of their programs to bring them to modern platforms seems like a great time to move directly into a leadership position - the money will be spent anyway.

There are strong opportunities for exit. If TeamSystem can capitalize on opportunities for growth, they can position themselves for either a sale or an IPO. In terms of an IPO, TeamSystem is expected to show steady growth. The market is kept relatively closed by the complexity of the Italian taxation system. Furthermore, the company has a strong leader.

The opportunity for a sale might be even better. Two factors are at work - the Internet and barriers to entering the Italian market. The Internet is increasing the pace of technological change in the tax software industry. This is going to increase R&D costs, meaning that economies of scale will become more important. Also, we are seeing at this time that other industries are leveraging the Internet to take their operations global, as physical barriers become less relevant, particularly in a service-based industry such as this. Put the two together and you have large firms looking to take their operations global to improve their economies of scale. The best way for such a firm to enter the Italian market would be to purchase an existing operation, and with few non-family firms to choose from, TeamSystem would be a natural acquisition target.

These considerations aside, there are risks. The biggest risk at present is the management team. Aside from the CEO, this team is considered to be weak. Yet, to achieve the growth objectives and goal of technological leadership, a strong team will be needed. If Palamon makes...

This places a strong emphasis on achieving the growth objectives in order to make the purchase bid worthwhile. A case could be made for lowering the bid amount in order to reduce some of the risk.
Using the Guideline Company Method, since Palamon is planning to dramatically change their debt-to-equity ratio upon purchase, a valuation based on future estimates seemed more fitting. With the expected growth, the firm in future should be measured against the Tier Two companies. Amongst those firms, an accounting for differences between their figures in U.S. dollars and TeamSystem's figures in lira, it is reasonable to expect that by the time Palamon is ready to exit, 51% of TeamSystem's equity will have a value of 28.7 million euros. In order to achieve the desired rate of return on the investment, the current offer price being considered is probably a bit high.

Conclusion

TeamSystem is a strong company with excellent growth potential on many fronts. The elements Palamon looks for in a takeover target are in place, save for the strong management team. In this case, I would recommend that before Palamon proceed with the offer, they should ensure that they have a strong plan ready to replace the existing management team with the exception of the CEO.

Using either method of valuation, the proposed offer price of 25.9 million euros for a 51% stake seems generous. The company is not worth that now, and to make adequate return may extend the timeline beyond Palamon's preferences. I would start the bidding a few million euros lower - or make very aggressive growth plans based on technological leadership and leveraging the competitive advantage of having access to capital markets.