Match made for DealerSocket, Auto/Mate

DealerSocket had hoped the deal code-named "Project Emerald" could make a big splash at this year's NADA Show.

After weeks when that seemed in jeopardy, the wish ultimately came true.

The Irving, Texas, dealership software company last week completed the acquisition of its emerald — dealership management system provider Auto/Mate. After the deal cleared Feb. 10, both companies said in a statement they planned to "launch and celebrate" their combination at the influential trade show set to kick off four days later, on Friday, Feb. 14, in Las Vegas.

But the chance to make their public debut as one company in front of a captive audience of thousands of potential dealership customers nearly didn't happen. A lawsuit brought by DealerSocket co-founder Brad Perry in a Delaware court temporarily blocked the deal from going forward, and an agreement to settle the case just days before the start of the show lifted the judge's order.

DealerSocket CEO Sejal Pietrzak declined to discuss details of the case, but she told Automotive News last week she had been optimistic the deal would come together in time.

"We're calling our big announcement through NADA our 'match made in Vegas,' " said Pietrzak, who met with Auto/Mate's staff after the transaction closed. "We'll be doing quite a lot of joint discussions with customers and really spending a lot of time together with our teams."

Acquisition terms were not disclosed. But the deal was estimated in a court transcript at roughly $200 million; it had been in the works since at least August 2018, according to a DealerSocket court filing.

That means DealerSocket's interest in Auto/Mate came several months after the Federal Trade Commission scuttled DMS giant CDK Global Inc.'s bid for Auto/Mate in March 2018, citing the likelihood of reduced competition. After the CDK deal fell through, Auto/Mate announced in a news release that it was no longer for sale.

Together, DealerSocket and Auto/Mate have more than 9,000 dealership customers, both franchised and independent, and an expanded array of software products, including DMS and customer relationship management platforms.

Auto/Mate now gives DealerSocket a foothold in the franchised DMS space. DealerSocket had offered a DMS to used-vehicle dealerships. And DealerSocket anticipates using gains created in the acquisition to further invest in its products, including expanding the use of artificial intelligence to provide more business intelligence, and also ensuring that all tools offered to dealerships seamlessly connect with one another. Mike Esposito, Auto/Mate's CEO, said one goal is to use data to provide dealerships with a 360-degree view of the customer across the full platform.

"Having a full-platform solution has been a vision of DealerSocket's," Pietrzak said, "and now we finally have that franchised DMS to fully integrate with our products."

That full-platform solution was a benefit DealerSocket and Auto/Mate deal announcement.

That plan, however, quickly came to a halt. On Jan. 14, Perry sued DealerSocket, the company he started with Jonathan Ord nearly two decades ago in a garage, and the private equity company the pair brought in as an investor. Perry sought to block the transaction on the grounds that he was frozen out of the process.

Perry and Ord declined interviews through their lawyer, Sanford Michelman, who told Automotive News in January that his clients, both of whom are DealerSocket board members, weren't necessarily opposed to a deal but hadn't been given the information they needed to independently evaluate it.

Perry's lawsuit accused private equity company Vista Equity Partners, DealerSocket and several board members of deliberately withholding information about the Auto/Mate acquisition as part of a larger effort to dilute the co-founders' minority stake. Vista bought a stake in DealerSocket in 2014 and is now majority owner.

Ord filed a separate lawsuit in December demanding to inspect DealerSocket's books. Both co-founders raised questions about fluctuating valuations of DealerSocket. Perry's complaint cited a plunge in DealerSocket's equity valuation last year from $499 million in June to about $28 million by September. That prompted a judge in the Delaware Court of Chancery, where the case was filed, to ask in a Jan. 16 hearing whether the lower figure was a typographical error.

Vista lawyer Matthew Solum told Automotive News a valuation of DealerSocket of $28 million was not a typo, but rather an assessment by Valuation Research Corp., which he described as a third-party company. It was based on the outlook for the company at the time, he said.

Vista plans to invest up to $263 million in equity as part of the Auto/Mate transaction, according to court filings, and it will allow all shareholders to participate. One dispute in the case concerned how much of a collective stake DealerSocket's minority shareholders would hold in the company going forward.

According to court documents, DealerSocket denied Perry's claims as "utter fiction," adding that "this case is about two individuals seeking to gain leverage in a misguided attempt to buy back the company they sold to Vista."

DealerSocket attorney David Ross stressed the urgency of finalizing the Auto/Mate acquisition before the NADA Show in a Jan. 30 hearing. The show, he said, is "one of the most important trade shows and a unique opportunity to launch the combined companies."

About a week later, on Feb. 7, Ross notified the judge in the case that the parties were working on a settlement and asked him to cancel a Feb. 11 hearing on whether to issue an injunction preventing the deal from proceeding while litigation was pending. Vice Chancellor J. Travis Laster lifted the temporary restraining order on Feb. 10, and the companies said they had completed the deal hours later.

Lawyers for Perry, DealerSocket and Vista did not respond to messages seeking comment about how the deal came together. Settlement details have not been publicly released.

Perry, however, appeared to be satisfied with the lawsuit's resolution. In a statement included in a release last week announcing the deal's closing, Perry said, "It is terrific to finally see the combination of these two companies that are so focused on the needs of the dealer."

Both Pietrzak and Esposito told Automotive News that their respective companies' dealer-centric focus is a shared value that made tying up attractive. Dealers have communicated interest in the combined offering, Pietrzak said.

Some dealers likely hope that Auto/Mate remains unchanged by the transaction.

Dealers "like the culture at Auto/Mate because it has excellent service," said John Darmento, director of the Gillrie Institute, a dealership consulting company in Wesley Chapel, Fla. Installs are done well, the product is simple to use and the company's personnel are friendly, he added.

Pietrzak said Auto/Mate's focus on customer service will remain a priority. While the combined company will be based at DealerSocket's Texas headquarters, Auto/Mate will continue to operate out of Albany, N.Y. And, she added, the Auto/Mate name will carry over in combination with DealerSocket's name because of its "incredible brand reputation and recognition in the market."

Esposito remains CEO of Auto/Mate, though the executives said the companies are still working through the transition and what role Esposito will play in the future. No layoffs or job reductions are expected, Pietrzak said.

"This is all very much starting, but our conversations are already happening with dealers, who are thrilled about having this new choice," she said.

"We're looking forward to having that conversation."