Massive Novitex-SourceHOV Merger Will Unleash $1.5B Financial Technology MSP Powerhouse

Novitex and SourceHOV have agreed to join forces, creating a 23,500-person behemoth that provides IT services to more than 60 percent of the Fortune 100.

Stamford, Conn.-based Novitex, and Irving, Tex.-based SourceHOV are being brought together in a $2.8 billion transaction spearheaded by St. Louis-based Quinpario, a special purpose acquisition company. The merger is expected to close in the second quarter, and the combined, publicly-traded company will be called Exela Technologies.

"The combination of Novitex and SourceHOV supports our strategy of serving as an end-to-end provider of innovative cloud-enabled solutions in the document outsourcing industry," John Visentin, Novitex's executive chairman and CEO, said in a statement. "This combination allows us to further enhance our strategic focus in providing leading-edge, integrated enterprise information management services."

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Exela's 3,500 customers operate in more than 55 countries and span the financial services, insurance, healthcare, law, government and commercial verticals. More specifically, Exela's customers will include the top five healthcare payers, all ten of the top U.S. banks, and nine of the top ten U.S. insurance companies.

"Our journey from people-intensive to technology-enabled services and our combination with Novitex fundamentally increases our scale," Ron Cogburn, Source HOV's CEO, said in a statement. "We are excited about the possibilities the transaction will bring to the business services sector, as it positions us well for growth in our key markets."

Novitex is currently owned by Apollo Global Management, while SourceHOV is majority owned by HandsOn Global Management. Exela's board of directors will consist of eight members, three of whom will be nominated by HandsOn Global Management, two of whom will be nominated by Apollo, and three of whom will be independent directors.

Exela expects to achieve at least $37.5 million of cost savings in its first three to nine months. Roughly $23.7 million of the savings is expected to come from headcount reductions, $10 million will come from consolidating vendors, and $3.8 million is expected to stem from reducing the number of facilities.

"These two businesses have strong, proven management teams with a track record of realizing cost savings and improving margins, with identified synergies that will provide significant growth opportunities and free cash flow generation," Jeffry Quinn, Quinpario's chairman and founder, said in a statement.

The deal is valued at 7.3 times Exela's projected 2017 earnings before interest, taxation, depreciation and amortization (EBITDA) of $385 million. The $2.8 billion deal will be financed through $1.35 billion in new debt financing, $806 million of rolled over equity from SourceHOV, $311 million of cash from Quinpario, and $306 million of rolled over equity from Novitex, the company said.

Exela will enjoy a diverse revenue stream, with its top 10 clients accounting for less than 20 percent of overall revenue and its top 250 customers each delivering more than $1 million of annual sales. The combined company will have more than 125 delivery centers globally and be on-location at more than 1,400 client sites across the U.S.

SourceHOV was formed by the April 2011 merger of SourceCorp and Lason, and grew further through the November 2014 acquisition of BancTec and September 2016 purchase of TransCentra. As a result, Lason's revenue has skyrocketed from $159 million in 2010 to an expected $900 million in 2016.

SourceHOV has recently focused on growing revenue from its top customers through both white space and geographical expansion. Specifically, the company has attempted to move from a regional to global vendor with its multinational customers and has scaled bundled service offerings through seamless platform connectivity and pricing incentives for add-on services.

Novitex, meanwhile, invested $100 million in its technology and offering capabilities to capitalize on the fragmented markets and become the leading single-source, multi-solution provider. Leading areas of investment include cloud business systems, infrastructure, production centers, communications management, managed print services, business intelligence, legal offerings, and postal optimization.

More than a third of Novitex's revenue is driven by its top 10 accounts, and 80 percent of the company's overall revenue is contractual. The company has been a leading mail management and production provider for the past three decades, and has more recently invested in digital services to better connect the full document lifecycle.

Quinpario, SourceHOV and Novitex did not respond to requests for additional comment.