Open Text Adds to Spending Spree With $1.6 Billion Dell Dealby and
Biggest Canadian tech acquisition since CGI bought Logica
Deal could prompt credit rating downgrade from Moody’s
Open Text Corp. said it will buy Dell Technologies Inc.’s enterprise content business for $1.6 billion, the biggest deal ever for the highly-acquisitive Canadian software company. Its stock soared the most in seven months.
The deal removes one of Open Text’s biggest competitors in its core area of expertise -- helping companies organize and access large amounts of their own information. The transaction includes Documentum, corporate document tracking software that was part of EMC, which Dell acquired earlier this month, the company said Monday in a statement. Open Text’s stock rose 9 percent to C$85.01, the biggest single-day jump since February. Moody’s Investor Service said it would review the company for a possible credit rating downgrade.
Open Text has been on a spending spree, investing nearly $3 billion since the beginning of 2014 on acquisitions as Chief Executive Officer Mark Barrenechea works to grow revenue and maintain market share. The company, based in Waterloo, Ontario, specializes in buying legacy software from other companies and working to pull more profit out of them. Earlier this year it bought four different software products from HP Inc. for $315 million.
The deal is the biggest acquisition by a Canadian tech company since CGI Group Inc. bought Logica Ltd. for $3.1 billion in 2012 and the price tag dwarfs that of Open Text’s other recent acquisitions. The company should put a cap on acquisitions before its debts pile up too high, said Erik Gordon, a professor at the Ross School of Business at the University of Michigan.
“It is time for them to focus on making their acquisitions work,” Gordon said. “If you take on too much debt to finance a string of acquisitions you may not have enough free cash flow to improve their operations.”
Open Text will decide how to finance the deal before it closes in three to four months, Chief Financial Officer John Doolittle said on a conference call. Barclays Plc has provided a $1 billion debt commitment. As of June 30, the company had $1.3 billion in cash, according to its latest earnings report, but it wants to keep about $1 billion of that on its balance sheet, Doolittle said.
“It’s clear that excess cash will be a key part of the financing,” Doolittle said. The company can also draw on an existing $300 million bank loan, he said.
Open Text is rated Ba1, the highest level of junk, by Moody’s, but that rating could be in danger depending on how the company finances the deal, the rating service said. It placed Open Text on review for a potential downgrade.
“Maintaining a conservative balance sheet and our credit ratings will be an important part of our thought process,” Doolittle said during the conference call.
With fierce rival Documentum out of the way and the possibility of working more closely with Dell as a strategic partner, Open Text is in a better position to compete with IBM Corp. and Oracle Corp., said Eyal Ofir, an analyst at Dundee Securities. Ofir raised his rating on the company’s stock to a buy from the equivalent of a hold.
“This is right in our wheelhouse, we know the market extremely well, we know the products extremely well,” Barrenechea said on the conference call. “There’s extremely strong strategic rationale.”
Barclays acted as a financial adviser to Open Text and Morgan Stanley acted as financial adviser to Dell Technologies.