Breaking up is hard to do: Farewell to Altium

It was a bittersweet moment for Altium (ASX: ALU) investors last week, as ALU and Renesas Electronics Corporation (6723 JPY) entered into a scheme implementation agreement for Renesas to acquire Altium for A$68.50 per share or equity value of A$9.1 billion.

We believe Renesas, an advanced semiconductor solutions supplier and current customer of Altium, saw a culture of innovation, long-term planning and consistent execution from the long standing highly aligned board and executive team which has led to a track record of strong earnings growth, margins & return on capital.

While Blackwattle investors enjoyed the sugar hit of a 31% takeover premium, we see Altium as one of the highest quality companies in the ASX.

"ALU possesses a significant growth opportunity over the next decade led by a management team with significant ownership and long-term, strategic mindset, we're disappointed to be missing out on that future return opportunity"

As we have gotten to know Altium better over the years we continued to be impressed as the company evolved from a singular focus of printed circuit board design software to a provider of an ecosystem of tools for the broader electronics design and manufacturing industries. 

Growth levers broadened as innovation introduced products attracting new customers (tiering to premium Enterprise customers) and monetising their ecosystem (Octopart and Altium365).

"This evolution enabled Altium to grow revenue at almost 20% CAGR for the past decade." 

This was all executed whilst maintaining tight control of costs, to enable expansion of margins and best in class returns.

A key lesson we have been reminded of from owning Altium is that it can be difficult to buy high-quality companies at premium valuation multiples. 

"Altium has traded at an average PE multiple >50x over the past decade."

However, the ability of high-quality businesses with aligned management teams to consistently surprise with new products, revenue streams and subsequent pricing power, compounded over many years, can make the initial entry point look like a bargain quite quickly.

Altium ranked as one of the highest quality businesses on our proprietary Quality Scorecard Tool, which generates a Quality Score based on multiple quality criteria. 

"One of the most incredible characteristics of Altium was the returns it produced, with a return on invested capital of ~90%."

For as long as we have followed the company, Altium have never required external capital (debt or equity), nor have they capitalised any Research & Development costs (which is rare within the ASX technology sector). This modest invested capital base set it apart from other profitable technology businesses which have significantly larger invested capital bases, reducing their returns.

Now that this wonderful example of a high-quality company is set to leave the ASX, we celebrate the win for insiders & shareholders and get back to hunting for the next high quality success story to take its place.

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Tim Riordan & Michael Teran