Oracle Veteran Brings M&A Playbook to Open Text

Open Text Corp. Chief Executive Officer Mark Barrenechea, taking a page from former boss Larry Ellison’s merger playbook at Oracle Corp., is planning to expand the Canadian software maker by going shopping again.

Open Text, which has a market value of C$4.21 billion ($4.1 billion), spent at least $750 million on five acquisitions in 2011 and 2012. The Waterloo, Ontario-based company, which makes programs to help companies improve operational efficiency, had C$447 million of cash at the end of last quarter.

“We will continue to make acquisitions,” Barrenechea said in a telephone interview from San Francisco, where he was traveling. Whether from cash flow or raising fresh debt or both, “we have all the strategic flexibility we need, all the way from operating the company to any deal size we see in the marketplace.” He declined to give a time frame or say whether he’s currently working on a deal.

Barrenechea spent 15 years in Silicon Valley, including a six-year stint at Redwood City, California-based Oracle, where he reported to founder Ellison. Since moving to Canada to become CEO of Open Text in January 2012, he’s hired six new executives; boosted the sales force by 20 percent to chase opportunities in Latin America, Asia, the Middle East and Eastern Europe; and last month began paying the company’s first dividend.

“Their cash flow is huge and dividends are only one use of that,” said Kris Thompson, an analyst at National Bank Financial in Toronto who rates the stock the equivalent of a buy. “There’s going to be more M&A for sure.”

Filling Gaps

Founded in 1991, Open Text gets its name from a text-search technology developed through a University of Waterloo project. Clients include Chartis Group LLC, Deutsche Lufthansa AG and Sprint Nextel Corp.

The company’s most recent acquisitions have been to add features or fill in gaps in its corporate-efficiency software, including EasyLink Services International Corp. for messaging technology and Resonate Knowledge Technologies Ltd. for data-sifting programs. Barrenechea declined to say what companies he’s now targeting.

Open Text was up 31 percent this year through yesterday in Toronto trading, the second-best performer of the seven companies in the Standard & Poor’s/TSX Information Technology Index, trailing only rival CGI Group Inc. Open Text climbed 2 percent to C$72.97 at the 4 p.m. close in Toronto today.

Track Record

The company has enough cash and debt to take on $1 billion in acquisitions, said Eyal Ofir, an analyst at Clarus Securities Inc. in Toronto.

“The company’s track record of acquisitions is a greater reason to own the stock into 2014,” he said last week in a research note. He established a buy rating with a price target for the U.S. shares of $85, compared with yesterday’s close of $69.66. His estimates assume an acquisition of $500 million over the next 12 months.

Still, Barrenechea must contend with slowing growth. While sales in the current fiscal year, which ends in June, are forecast to climb 14 percent to $1.38 billion, they’re projected to expand 5 percent next year, according to the average estimate of analysts compiled by Bloomberg.

Barrenechea is looking to boost sales by adding clients outside North America and Western Europe that need to overhaul their information systems.

Content Management

He’s also offering more products to current customers. A typical client might have information stored about contracts or workers that could be put to greater use through a more interactive system, Barrenechea said.

“Content management is about putting that into a single platform,” he said. “The next step is building applications on top of that to automate everything from the recruitment to the retirement process.”

Enterprise information management, as it’s known, is set to grow to a $19 billion industry in 2016 from a $13 billion industry today, according to Gartner Inc.

U.S. competitors include CA Inc., where Barrenechea was chief technology officer from 2003 to 2006 after leaving Oracle. Barrenechea said he looks back fondly on his tenure at the company Ellison founded in 1977. Oracle is now worth $162 billion and bought 11 companies in 2012 alone.

“It was fantastic,” Barrenechea said of the time he spent reporting to Ellison as senior vice president of applications development. “I think of Larry as, certainly a competitor, but fundamentally a software architect and a brilliant strategist.”

Deborah Hellinger, an Oracle spokeswoman, declined to comment.

First Dividend

Just as Oracle rallied when it declared its first dividend in 2009, Open Text prompted a 12 percent jump in its stock on April 25 by announcing a shareholder payout of 30 Canadian cents a share.

The move should attract new investors, said Tom Liston, analyst at Cantor Fitzgerald LP. He raised his rating for Open Text to buy after the dividend news, lifting the number of buy recommendations on the stock to 10. Open Text has four holds and two sells, according to data compiled by Bloomberg.

One of those sells is Michael Nemeroff, an analyst at Credit Suisse Group AG who said the dividend may cause investors who prefer high-growth companies to lose interest.

“The new payouts could be viewed as an admission by management that OTEX will not likely return to double-digit revenue growth,” he said in a research note last month, using Open Text’s U.S. ticker symbol.

“Our strategy is value and growth,” said Barrenechea. “We are investing in innovation, acquisitions and now a dividend.”

Waterloo Talent

Open Text’s headquarters are located blocks away from the offices of BlackBerry, the smartphone maker trying to engineer a rebound after being eclipsed by nimbler rivals. Waterloo remains a good place to build a business as, like Silicon Valley, it offers a deep talent pool and is a place where people aren’t afraid to take risks, said Barrenechea. It needs to improve startups’ access to venture capital, he said.

“What is the Canada of the future beyond a resource-centric country?” he said. “You have to invent and you have to innovate.”

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