- Canadian business software maker reports earnings Wednesday
- Company is on $750 million buying spree in last four months
Shares of Open Text Corp. are trouncing global peers as the Canadian maker of business software pursues a bargain-basement shopping spree.
Open Text has spent almost $750 million on acquisitions in the past four months according to data compiled by Bloomberg, including legacy products from HP Inc., and Chief Executive Officer Mark Barrenechea may just be getting started.
“What they acquire are generally seen as low-growth assets and the organic growth of their existing products is minimal,” Thanos Moschopoulos, an analyst in Toronto at BMO Capital Markets, said by telephone. “But they have clearly demonstrated repeated success turning that into shareholder value.”
The Waterloo, Ontario-based company is up 69 percent in the 12 months through Monday for a market value of C$10 billion ($7.6 billion). That’s top among its application-software peers which had an average gain of 7.1 percent over the period. The company’s two largest rivals, Walldorf, Germany-based SAP AG, and IBM Corp., based in Armonk, New York, have gained 16 percent and 4 percent in that period.
Open Text was spun out of a university project in 1991 after a four-person team developed a search engine that could index the Oxford English Dictionary. The software maker now has 8,600 employees and posted revenue of $1.9 billion in 2015.
The company’s license revenue, including its flagship business content-management service -- a software product that allows large organizations to host, organize and access their documents and information -- accounted for about 15 percent of its latest quarterly revenue, while cloud services generated more than 33 percent, according to the company’s last quarterly report. The company is riding a global shift towards cloud-based information management systems.
Moschopoulos estimates Open Text will report fourth-quarter adjusted earnings per share of 95 cents when it releases results Wednesday, versus 87 cents in the prior period and the 94-cent average of 12 estimates in a Bloomberg survey. The Toronto-based analyst, who has the equivalent of a hold on the stock, sees revenue of as much as $494 million, and has a target price on the shares of C$85. They were down 0.4 percent at C$82.13 at 12:01 p.m in Toronto.
Open Text targets overlooked assets that either compete directly with its products -- allowing it to cheaply add a new client base -- or that can be integrated with relative ease to bolster cash flow, Moschopoulos said.
“What works is that the company is a value buyer,” he said. “It’s not a completely unique strategy, but Open Text has historically shown they execute it very well, if not the best.”
Take its recent acquisitions. The company agreed in April to purchase HP’s customer experience suite for $170 million, even though the older products -- which include HP TeamSite, a management platform for web content and HP MediaBin, a digital asset management system -- offer little synergy with existing products and no technological improvements, Moschopoulos said. Instead, the deal will immediately generate annual revenue of as much as $95 million in maintenance fees, according to the company.
Last month’s addition of closely held Recommind for about $163 million also fits the bill. The San Francisco-based provider of eDiscovery and information analytics, help users find data in large IT systems. That transaction is forecast to provide $70 million to $80 million a year in revenue immediately after it closes, Raymond James’ analyst Steven Li wrote in a note to clients.
Open Text is looking for deals and is exploring the possibility of larger acquisitions, Barrenechea, 51, told Bloomberg in April. The company is planning at least C$3 billion in acquisitions by 2019 and raised $600 million in debt in May to help fund that goal.
The company recently unveiled a plan for a predictive enterprise content-management system to take on IBM’s Watson machine at its 2016 Enterprise World Conference in Nashville. Li sees that as a potential boon for the company, which has posted fluctuating quarterly results for its flagship product since 2014.
“They’re in a good position right now, said Li, who also recommends buying the shares. Nine analysts say sell the shares, three say hold and the company has no sells, according to ratings compiled by Bloomberg. “Their ECM system has the potential to offer things that institutional vendors like IBM and SAP don’t, such as neutrality, affordability and open-source functionality. The fact that they have set their sights on IBM is a good sign.”
Another positive sign for Open Text is the limited effect Brexit has so far had on software makers with exposure to the European market. Yet with more than a third of its annual revenue coming from Europe last year, any further fallout from the U.K.’s shock vote to leave the European Union is always going to be a concern for the company, said Li. Another risk is developing and maintaining better organic growth, he said.
Moschopoulos predicts Open Text’s success will continue so long as it can execute on its M&A strategy. “There is certainly more upside than downside here,” he said.
(An earlier version of this story corrected Moschopoulos’s rating).