The acquisition, probably the biggest gov tech deal ever, would bring together a giant of local government software with a giant of state software. Here's how the deal came together, and what it might mean for gov tech.
In what’s most likely the largest gov tech deal ever — one which would bring together a giant of local government software with a giant of state government software — Tyler Technologies is moving to acquire NIC.
The deal, for which Tyler plans on spending $2.3 billion, still needs approval from regulators and NIC stockholders. But the price per share of both of the companies rose Tuesday following the news, and the acquisition is one Tyler has been working on for a very long time.
THE TYLER-NIC DEAL BY THE NUMBERS
“We actually internally have had conversations at the highest level about NIC for probably 15-plus years just kind of off and on periodically,” said Lynn Moore, Tyler’s CEO. “We’ve watched them in the market, they’re obviously a leader in the state public-sector space. A really quality company, quality leadership, a company of integrity. So we’ve looked at them from time to time, and really I would say going back to the summer is when we started getting really serious.
“I can tell you one of the hardest things for me over the last six, eight months has been trying to keep my mouth shut,” he added.
Moore said many of the details about exactly how the two companies will come together are either hush-hush because of the pending regulatory approval process or have yet to be worked out. Questions like what the structure will be and how they will work together will have to wait, and the CEO said it will be business as usual through the end of 2021.
“Our first mission is … don’t break any part of what’s been their success. And we’re going to sit down with their team, we’re going to sit down with Harry Herington and we’re going to map out what is the best approach and really the timetable for that approach.”
As large as the two companies are — NIC brought in $461 million in revenue last year, while Tyler likely pulled in more than $1 billion — there’s remarkably little overlap. Tyler’s focus has been on local government needs ranging from courts to open data to finance, while NIC has long been a force in digital services and payments for states.
“We really don’t compete head-to-head with NIC, primarily because our presence in the state market is really pretty small,” he said.
One thing is for sure: Tyler will be looking to use the merger as a way to expand its footprint in the state market, as well as push further into the federal government.
“These statewide enterprise contracts that they have, which are currently with 31 states — those contracts are pretty open-ended, and for lack of a better term, allow for kind of a hunting license where they can go in and sell to different state agencies,” Moore said. “They have a few vertical solutions, we obviously have a number of vertical solutions. It’s an opportunity where we can get more solutions to government customers.”
One of those customers is the state of Utah, which has worked with NIC going all the way back to 1998. Dave Fletcher, the state’s chief technology officer, said Utah runs its payment portal as well as several hundred digital services such as professional licensing and vehicle registration renewal.
“I interact with them once a week — well, every day usually, on different issues, with as many different services as we have with them,” he said. “It’s generally been a positive relationship.”
The state has also used the data platform Socrata for more than five years, since before Tyler Technologies bought that company out. So Utah has been through a Tyler acquisition before, and Fletcher said he had no complaints.
“Obviously Socrata was an important transition for us that we didn’t want to lose the capabilities that we already had with Socrata because we’d invested so much in what we had,” he said. “So we’re cautiously optimistic, I would say, because we want to make sure that we can continue on a progressive path where I think we’re anxious to speed up the progress of digital government and just want to ensure this doesn’t impact that negatively in any way.”
He said he will be watching to see if NIC continues down a path of creating a standard-based platform for digital services, which allows the state to create services more easily and avoid starting from scratch.
The deal is Tyler’s largest, but is surely the largest in gov tech history as well. Jeff Cook, a managing director at the mergers and acquisitions advisory firm Shea & Co., was involved in another of the largest gov tech deals when CentralSquare came together in 2018. This deal is larger than that one.
It could also be a good thing for the gov tech ecosystem as a whole.
“Whenever we have seen large acquisitions really in any market in software, I think it awakes a lot of companies and investors to the underlying opportunity. So I would say over the long term it’s going to make a lot more people take notice, and it will likely trigger a cycle of investment, growth and even company formation in this market,” Cook said. “I look at it as very much a positive.”
It also speaks to the importance of digital services, especially during the pandemic. With offices shut down and government facing an imperative to keep serving citizens while minimizing risk, Cook said digital services were the fastest-growing segment of gov tech last year.
“(The NIC acquisition is) a statement to the market that citizen digital services is the future,” he said. “We’re still in the early innings of investments in technology to provide better digital services to constituents, which the pandemic has only accelerated.”
Moore said it’s also spiked demand for cloud services, which have been useful during the pandemic because of the relative speed with which they can be deployed.
“If you look back five years ago, maybe 25 percent of our new sales were SaaS, or in the cloud,” Moore said. “This past year it was more like 55 percent.”
Such a large merger is not without pitfalls. Aside from the challenge of aligning company cultures and getting people to work together, there’s also the matter of continuing to serve customers well. Moore said he’s confident that the deal won’t “handcuff” Tyler’s balance sheet or its ability to invest in research and development.
Still, Cook said, big deals like this can create opportunities for competitors.
“With any acquisition, I think the integration process can create distraction,” he said. “With that distraction, where there is an imperative to modernize as these large incumbents are set back a little bit in terms of being able to really lean forward on product development, it does open a window for folks like PayIt to really accelerate their growth … into that market while some of the large folks are distracted.”
With so much demand for the very services Tyler and NIC are providing, Moore sees a bright future ahead.
“When I look out at the future of the public sector, whether it’s local, state and even federal, the future is really all about the cloud,” he said. “It’s the provision of subscription-based essential functionality. It’s about delivering digital services to citizens. It’s about more and more transaction-based revenue. It’s about data and insights.”
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