Jefferies lowered its rating on Open Text (OTEX ) to underperform from hold.
Yesterday the company offered to buy the remaining IXOS Software AG shares. Analyst Robert Schwartz says he's downgrading on valuation and concerns about the quality of the company's acquisitions, earnings per share, and cash flows.
He says the IXOS deal has caused the company to miss earnings per share in the last few quarters. He notes earnings per share quality is poor, as free cash flow is only 70% of pro forma earnings per share in contrast to peers, with free cash flow 110% of pro forma earnings per share.
Since Open Text aggressively buying companies, its net accruals have risen dramatically. Schwartz doesn't think the acquisitions per-se destroy shareholder value, but they do create gap between free cash flow and earnings per share.