At long last, Open Text makes a BPM play

Contact:  Brenon Daly

More than a year and a half ago, we noted that Metastorm was looking to buy its way into some adjacent markets such as risk and compliance or perhaps collaboration. The planned shopping trip would have come after the business process management (BPM) provider pulled its IPO paperwork. At the time, however, we wondered if the would-be IPO candidate might not head to the other exit: a trade sale.

Specifically, we floated the single name of Open Text, which we noted had consolidated much of its core enterprise content management (ECM) market but still appeared to be losing deals to rival vendors with more robust BPM offerings. However, we thought that valuation might make it tough to bridge the bid/ask spread between the two sides. In most of its dozen deals over the past decade, Open Text has paid somewhere in the range of 0.5-1.5 times trailing sales for its acquisitions. That’s true for its most visible purchases, including deals that saw it gobble up rival ECM firms Hummingbird in August 2006 and Vignette in May 2009, as well as add image capture software maker Captaris in September 2008.

As it turns out, valuation didn’t necessarily snag Open Text’s significant acquisition to bolster its BPM credentials. The company said late last week that it will hand over $182m in cash for Metastorm. In a conference call, Open Text indicated that Metastorm was generating $70-75m in sales, implying a valuation of about 2.5x sales for the BPM provider. That’s a fair bit richer than the valuation that the Canadian consolidator has paid in the past. However, we suspect that guidance assumes a bit of revenue write-downs and (perhaps) a bit of sandbagging. The reason? Metastorm said in mid-2009 that it was above that level of revenue in 2008 and targeting $90m in 2009. In its IPO filing, Metastorm reported $60m in sales for 2007.

ECM: And then there was one…

Contact: Brenon Daly

With the US government having blessed on Friday the pending marriage between Open Text and Vignette, the only remaining obstacle in the $310m pairing is a vote by Vignette shareholders next month. And we expect pretty quick approval of the offer from Vignette’s long-suffering shareholders, who had seen their shares lose half their value in the half-decade preceding Open Text’s move. Over that same period, Open Text stock had gained about 16%, handily outperforming the 15% loss posted by the broader Nasdaq Index. (Share price is important in this transaction because Open Text is paying roughly one-third of the bill for Vignette in equity. Open Text stock is up nearly 10% since the deal announcement.)

If, as expected, Vignette shareholders sign off on the sale in their July 21 vote, the deal would mark the second major enterprise content management (ECM) vendor taken off the board in 2009. In January, Autonomy Corp announced a somewhat unexpected move into ECM by shelling out $775m in cash for Interwoven. That transaction closed in mid-March. The recent pairings continue a trend of major consolidation in the ECM market that started back in 2003, with EMC buying Documentum for $1.8bn. IBM, Oracle and Hewlett-Packard have also announced ECM deals of their own, pushing the announced value of acquisitions in the sector to $9.4bn since January 2002. For those of you keeping score at home, the one notable enterprise software company that hasn’t made an ECM move of its own is SAP. Of course, SAP just happens to be the largest partner for Open Text. So if the German giant does look to make a buy, we have a pretty good idea of who it might call.

Metastorm in the market in a big way

Contact: Brenon Daly

If Metastorm does re-paper an S-1, it will be a much larger company than the one that filed for an IPO last year. (The business process management (BPM) vendor put in its paperwork in mid-May and then pulled it in mid-September.) The growth will come both organically and from acquisition, CEO Bob Farrell said Monday during a presentation at the JMP Securities Research Conference.

In terms of organic growth, Farrell projected that the company would ring up about $90m in revenue this year, up from about $77m in 2008. Additionally, Farrell said he expected to add to the company’s top line with a shopping trip. We understand Metastorm has three term sheets out for possible acquisitions, with one possibly closing in the summer. One of the potential deals could double the company’s revenue. Farrell said his company has considered outside funding for a purchase, which is how it covered its 2007 acquisition of Proforma.

In terms of target markets, Metastorm is looking in several areas, including risk and compliance, collaboration and document management. In terms of possible BPM-document management transactions, we would note that we recently heard of deal flow going the other way. Open Text, having consolidated much of the content management market, said it may well look to buy its way into the BPM market.

Is Open Text open for a deal?

Contact: Brenon Daly, Kathleen Reidy

If Autonomy Corp’s $775m purchase last week of Interwoven came out of left field, we suspect the next major enterprise content management (ECM) deal will bring together a buyer and seller much more familiar with each other. As it stands now, Open Text is kingpin of the stand-alone ECM vendors. (The market capitalization of the Canadian company is almost 10 times larger than that of poor old Vignette, which we heard in the past was on the block.) Open Text is slated to report its fiscal second-quarter results Wednesday afternoon.

Most of the big software vendors have already done their ECM shopping, starting with EMC’s purchase of Documentum more than a half-decade ago. More recently, IBM and Oracle made significant purchases. And now we can add Autonomy to the list of shoppers, despite the company having downplayed the importance of content management in the past. (Apparently, it was important enough to Autonomy for it to ink the third-largest ECM deal.)

So who might be eyeing Open Text, which currently sports an enterprise value of $1.7bn? The obvious answer – and one that’s been around for some time now – is SAP. The German giant is Open Text’s largest partner, reselling four different products. Competitively, we don’t see Autonomy’s purchase of Interwoven affecting business much at Open Text, much less acting as a catalyst for any deal with SAP. (With its focus on the legal market, Interwoven only really bumped into the Hummingbird products that Open Text picked up when it bought the fellow Canadian company in mid-2006.) Still, SAP has already made one multibillion-dollar move to consolidate the software industry, acquiring Business Objects for $6.8bn in October 2007. If it looks to make another Oracle-style play, we guess Open Text would be at the top of the list.

Largest ECM deals

Date Acquirer Target Price EV/TTM sales multiple
October 2003 EMC Documentum $1.8bn 6x
August 2006 IBM FileNet $1.6bn 2.6x
January 2009 Autonomy Corp Interwoven $775m 2.8x
August 2006 Open Text Hummingbird $489m 1.6x
November 2006 Oracle Stellent $440m 2.9x

Source: The 451 M&A KnowledgeBase

Vector’s velocity

With all the bidding and buying, it’s hard to keep straight what’s going on with Vector Capital. Already this year, the tech buyout shop has made several offers for down-and-out companies. It even got one through last week, as portfolio company Tripos announced a $57m purchase of drug development software maker Pharsight. The deal is expected to close by year-end.

However, Vector’s other recent M&A moves, most of them coming as unsolicited offers, haven’t been as straight-forward. It made an on-again, off-again run this summer at Corel, a half-decade after taking it private and two years after spinning it back onto the public market. (We would note that Corel shares have never traded as high as they did at the IPO in spring 2006.) Vector also bid for troubled content management vendor Captaris, but lost out to the acquisition-hungry Open Text. The $131m deal is expected to close before year-end, and Captaris shares are trading as if the transaction will go through.

In addition to those mixed efforts, Vector has made an unusual two-pronged approach at Israeli security company Aladdin Knowledge Systems. First, it offered to buy Aladdin outright, offering $13 for each share it doesn’t already own. (Vector is Aladdin’s largest shareholder, holding some 14% of the company.) Then, Vector offered to pick up just Aladdin’s digital rights management (DRM) business. The DRM business is the most-attractive unit at Aladdin, and would fit nicely with SafeNet, which Vector took private last year. Perhaps not surprisingly, Aladdin has said ‘thanks, but no thanks’ to both unsolicited options, and has retained Credit Suisse to advise it.

Selected Vector transactions

Year Company Price Market
2008 Precise Software (Symantec) Not disclosed Application performance management
2007 SafeNet $634m Encryption security
2006 Tripos $26m Pharmaceutical industry software
2003 Corel $122m Desktop productivity software

Source: The 451 M&A KnowledgeBase

Open Text crashes LBO party (again)

For the second time in as many years, Open Text has topped a buyout shop to take home a struggling enterprise content management (ECM) vendor. In mid-2006, Open Text crashed a planned take-private of rival Hummingbird by Symphony Technology Group, along with financial backer Tennenbaum Capital Partners. To land Hummingbird, Open Text ended up paying about $18m more than the buyout firm had offered.

Open Text won’t have to reach nearly as far into its pockets this time around. On Thursday, the company bid $4.80 per share of Captaris, valuing the document capture technology vendor at $131m. That’s only a $1.4m – or less than 1% of deal value – bump over an existing offer from buyout firm Vector Capital. Vector made the offer of $4.75 per share of Captaris in March, six months after it began pushing the company to sell.

By the time Vector met with Captaris, it had snapped up about 2.7 million shares, or about 10% of the company. However, according to an SEC filing on its purchases, Vector paid around $5 per share. It’s hard to see how the buyout firm is going to be too far above water on its Captaris holdings, given the $4.80 per share offer from Open Text. As a final note, we close with the fact that if Vector had just bought a slug of Open Text stock when it started buying Captaris shares, it would be up nearly 40% on that holding. We know Vector isn’t a money management firm, but in this case, it would have been better to buy the buyer, rather than the seller.