Is Bob Brockman R&Running out of Options?

The IRS let the cat out of the bag… or just confirmed what many suspected anyway after Bloomberg’s publications in August and October 2020. Bob Brockman – the owner of The Reynolds and Reynolds Company (R&R), is accused of hiding $2 billion in income from the Internal Revenue Service.

Bob Brockman pleads Not Guilty

Federal prosecutors call it the largest tax evasion case against an individual in US history. They describe a web of entities in Bermuda and the Caribbean. There are also secret bank accounts in Bermuda and Switzerland used to conceal the income from taxation.

I won’t elaborate on the accusations. Instead, I will lay out some options about the company that Mr. Brockman molded into an automotive retail software behemoth of likely $2+ billion annual revenue and more than 4,000 employees in the US alone.

Quick CDK Excursion:

YES, R&R’s annual sales could well be higher than CDK’s despite less than half as many dealers under contract as CDK. Some may not realize how much the two are connected. First, there is the 20+ year history of mutually agreed business practices in a DMS duopoly. Then there is business they hold together (e.g., CVR). There are also connected conspiracy and lawsuits about third-party integration fees. And then there’s the notion CDK’s publicly portrayed “dealer growth” is only due to R&R’s unwillingness to adjust to new market conditions. R&R moves very slow in light of increased competition. See Cox Automotive with Dealertrack DMS, AutoSoft with new GO platform, Auto/Mate DMS powered by DealerSocket (Vista Equity), DealerBuilt (infused by ParkerGale), PBS Systems, Quorum, Tekion (newly labeled unicorn at $1 billion valuation), Dominion VUE DMS, and others. This ain’t no duopoly anymore:

• High pressure on price due to stronger DMS rivalry and shift in buying power
• Higher demand for innovation (i.e. cloud-based delivery, much-simplified UI, Digital Retail, zero contact sales and service, predictive maintenance, telematics,…)
• Significant need for improved SaaS usability and learnability (FYI: R&R ERA is not a point-to-click solution unless dealers upgrade to ERA Ignite which is not 100% available for all ERA executables.)
• Indisputable and industry-wide demand for an open and inexpensive dealership data sharing

Ergo, dealers are leaving Brockman’s R&R for the right reasons with little coming back. And we haven’t even touched on who wants to sign 66-72 month contracts with average price increases beyond inflation.

Option 1: Go Public

That’s a trendy thing to do right now, but how do you initiate an IPO of a 154-year-old startup? I would love to see the pitch deck and finally shed some light on what happens in the R&R board room. Maybe, former Reynolds and Reynolds President Ron Lamb, who left disgruntled in 2017, can serve as an advisor. Additionally, do an IPO at what valuation? At $2bn+ ARR and a multiple of 4, the company may be worth a hefty $8-10 billion. Tekion just closed a Series C at a $1.1 billion valuation with a revenue multiple of 150+. That’s how far both companies are off – figuratively.

Plus, what’s the narrative for an R&R IPO? Don’t look for a hockey stick: losing dealers, no real IP with very little innovation, and a big stack of legacy and equipment-heavy tech. Btw, over 75% of Reynolds and Reynolds dealers use on-premise servers (vs. ASP/SaaS). There are ERA servers, print servers, IDM document archive servers, DocuPad servers,… you get the message. Mr. Brockman may have been an IBM genius 30 years ago, but that IP may have faded.

Option 2: Sell Privately

Sounds logical to avoid public scrutiny, right? To some people’s surprise, this wouldn’t be the first time Bob Brockman and the company would explore selling. Cliff Banks reported that Reynolds and Reynolds had turned down an offer of $5.2 billion from private equity firm KKR in 2013 (with the prospect of taking it public).

Besides, two potential buyers are off the market. Cox Automotive closed its $4 billion investment in Dealertrack in 2016. Vista Equity (delicately run by Robert Smith) pursued Auto/Mate for approximately $260 million in 2020 to complement DealerSocket. Maybe KKR wants to renew its offer. How about heavy hitters Bain Capital, ThomaBravo, or Elliott Management?

There is also the option of doing something unexpected: selling the company to its dealers. In the recent Tekion financing round, FM Capital huddled up some dealers including Serra Automotive as limited partners to invest. Maybe Bob Brockman and his R&R team can turn to its big private dealer groups like the Hendrick Automotive Group for funding. Dealer investments are not unusual in the DMS space. For example, Galpin Motors took a stake at DealerBuilt from Dallas, TX in its early days. Naturally, that was before ParkerGale from Chicago acquired the company in 2019.

Option 3: Spin Off Assets

R&R certainly accumulated a colorful bouquet of complementary brands over the years. Besides its DMS business units R&R ERA (Ignite) and UCS Power, there are:

• AddOnAuto (founded by Sidney Haider)
• Callbright and Who’s Calling
• CoinData (DocuPad)
• GoMoto (founded by Todd Marcelle)
• KeyTrak and KeyVault (incl. KeyRegister By KeyLogic)
• NakedLime (incl. XtreamService and IMN)
• ReverseRisk (aka Axcessa, founded by David Spisak)
• Reynolds Document Services (i.e. forms)
• R&R International DMS units (if still existing)
• The Appraisal Lane (founded by Jeff Risner and Andrew Iorgulescu)
• TradeMotion (Parts.com)
• Xpressdocs
• and others

Selling its international DMS occurs to be a familiar option. Remember Cox Automotive and Incadea? It is also rival CDK Global that is said to explore offloading its international business around the Drive Autoline DMS. Nevertheless, it may take years to untangle some of the R&R brands and ownership constituents. If you haven’t noticed – everything at R&R is about contracts. Here is what dealers would have to do to audit Reynolds and Reynolds invoices.

Furthermore, here is an R&R/UCS anecdote from Europe from many moons ago. Dealer clients in the UK had to sign three separate agreements with three separate companies in three different countries. Hardware maintenance came from the UK company, software licenses from the Netherlands, and hardware purchases from the Caribbean. Doesn’t that sound like Bob Brockman’s tax scheme? [Tony – thanks for sharing!]

The Real R&R People

Full disclaimer – I know many of the R&R leadership members personally through dealer consulting projects. Despite Bob Brockman’s court case and his company’s sensitive reputation in the dealer body, I have the highest respect for the R&R team behind the curtain. There are many high-caliber and high-class people at R&R. You and I consider them true peers in our dealership technology industry. I hate seeing them getting drawn into the noise. Don’t forget what Reynolds and Reynolds means to the wonderful cities of Kettering/Dayton, OH, and College Station/Houston, TX.

The Clock is Ticking

If the accusations prove substantial, then there are plenty of options for Mr. Brockman to turn his assets into cash to alleviate potential tax penalties. However, it seems unlikely he will get away with a slap on his wrist just like Robert Smith from Vista Equity who dodged a massive bullet with a non-prosecution deal and $139 million fine. Who know’s what he had to say about Bob. The longer this will linger over Bob Brockman, the more likely the market will force his hand and dictate the price. We all saw what the pending CDK Global – Auto/Mate acquisition did in 2017 to Auto/Mate’s growth. It stopped the (sales) clock. For an entire year. Naturally, no dealer wants to buy or renew with a company in limbo.

Regardless of what is about to unfold, the days of pigeon shooting on a private ranch in Argentina are probably over. The same applies to dealer prospects that now may have to fly coach to Dayton instead of taking the private jet to get a tour of that fine R&R Dealership Experience Lab.

You can only squeeze so much until the (dealer) fruit has dried up.