The OpenText building in Waterloo, Ont.Kevin Van Paassen/The Globe and Mail
Canadian tech stalwart Open Text Corp. has struck a widely anticipated deal to buy its biggest competitor, the enterprise content division of newly merged Dell Technologies Inc., for $1.62-billion (U.S.). It is the Waterloo, Ont.-based firm's biggest purchase in a particularly busy year for deals, and the largest in its 25-year history.
"This acquisition has a strong strategic rationale," said chief executive officer Mark Barrenechea. "It is right in our wheelhouse. We know this space extremely well." The deal was well received by investors, as Open Text stock traded up 9 per cent in midday trading .
With the deal, expected to close within 120 days, Open Text will have purchased five businesses since May for about $2.4-billion, adding about $900-million in annualized revenue. That is equal to half the company's total for its fiscal year ended June 30. The company said in February it planned to spend $3-billion (Canadian) this year on deals. Investors have responded by driving up the stock by more than 25 per cent in 2016.
The latest acquisition marks a satisfying outcome for both buyer and seller. It offers Open Text a significant opportunity to consolidate the enterprise content management sector, whose vendors sell software that help business and government customers digitally store and access vast amounts of corporate information. It is a relatively modestly sized ($11.2-billion U.S. in 2015 revenue) but growing subsector of the enterprise software market, and Open Text has been a determined consolidator for years. "People have been talking about [this potential deal] for years," said CIBC World Markets analyst Stephanie Price. "It should be very accretive."
For Dell, which inherited the business in its predecessor's $67-billion takeover of EMC, it enables the tech giant to shed a non-core asset and help to pay off some of the related debt. The business was hot 13 years ago when EMC bought enterprise content firm Documentum – the core of the business Open Text is buying – for $1.7 billion. But since then it had become the "forgotten son that never really found its stride within EMC," industry publication CMS Wire reported earlier this year.
But one tech giant's cast-off is another's treasure. While much focus in the tech sector is on venture-backed companies growing revenues at a torrid pace and achieving enormous valuations, Open Text has created value by being a steady consolidator of flat-to-declining businesses, spending conservatively and generating steady earnings growth from its purchases while doing little to increase organic revenues. Meanwhile, it has focused its efforts on becoming the most comprehensive and respected vendor in the enterprise content market, transforming itself under Mr. Barrenechea's watch since 2012 from a hodgepodge of software businesses to become a comprehensive digital platform for the internal processes of large customers. Industry observers said the Dell purchase was a typical purchase. "They'll keep doing these sorts of deals," Ms. Price said.
The strategy has been successful for creating value and making Open Text the third most valuable publicly-traded tech firms in Canada, with a market capitalization of between $10-billion (Canadian) and $11-billion.
Analyst said they expected the new purchase to boost Open Text earnings by 15 per cent. And Mr. Barrenechea raved about his new purchase, calling its customers "incredibly loyal" with more than 75 per cent of revenue coming from recurring contracts and customers including the vast majority of the world's 10 largest players in each of pharma, banking, insurance and energy.
To finance the deal, Open Text has obtained a $1-billion (U.S.) debt commitment from Barclays, its financial adviser. The financing plan isn't finalized but will involve a combination of cash on hand, borrowing and an equity issue.
Open Text started as a University of Waterloo spinoff in 1991, creating the world's first online search engine, a tool that could digitally search the Oxford English Dictionary. It was the first search partner of Yahoo, but decided to focus on enterprise search solutions, abandoning a market in 1997 that Google would later dominate.