Wednesday, August 25, 2010

Open Text could find fewer acquisition opportunities. Are they a takeover target?

Open Text, the Waterloo, Ontario-based software company, could find it harder to locate suitable takeover candidates, reported the National Post.

Mike Abramsky, an analyst with RBC Capital Markets, said in a research note cited in the newspaper's Report on Business section that Open Text could during fiscal 2011 find fewer acquisition opportunities available, which could hamper efforts to grow value.

Open Text is one of two largest independent Enterprise Search and Content Management companies along with Autonomy. Both have been struggling organically given the worst economic cycles in enterprise software spending but also aggressively growing through acquisitions to consolidate the sector while also reaching critical size to become a meaningful takeover candidate. It is rumored that Oracle, EMC and SAP would be interested in OTEX. However, industry insiders surprisingly talk about Autonomy, the UK-based enterprise software group announcing a large acquisition soon, citing Open Text, the listed Canadian software company, as a possible target.

Given the firm’s rich valuation, Autonomy’s buying OTEX would make sense. Autonomy’s own story on paper sounds great: Class-leading IDOL technology with multiple vertical applications; defensive end-markets such as government, very high margins, impressive earnings growth and a strong balance sheet. However, I believe there are plenty of reasons to believe that the reality may not live up to the spin from the management. If Autonomy ends up acquiring OTEX (which is an acquisition machine itself with about the same size), I would stay away from the stock until the dust settles….because this would be just too big to swallow…almost two drunk men trying to stand still by leaning against each other.
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