In a conference call Wednesday, Open Text CEO Tom Jenkins said shareholders
owning 73 per cent of the Hamburg company’s shares had agreed to the transaction, and he expects the deal to close by the end of the year.
“”We think this deal is a good one for both companies,”” Jenkins said. Gauss — struggling with declining revenues and a poor balance sheet — gets firmer financial footing, while Waterloo, Ont.-based Open Text increases its critical mass in the content management arena, Jenkins said.
The market approved. Open Text stock traded at a new 52-week high on the TSX within minutes of the conference call announcing the transaction, and closed up $1.75 at $50.50.
Jenkins said the deal reflects the trend toward consolidation in the content management space, a trend to which Open Text is no stranger. After failed takeover bids for PC Docs in 1999 and Accelio in 2001, Open Text bought Richmond Hill, Ont.-based Centrinity Inc.; Eloquent Inc. of San Mateo, Calif.; and Boston-based Corechange Inc.
Jenkins said incorporating Gauss technology into Open Text’s flagship LiveLink suite will create “”one of the most comprehensive enterprise content management offerings”” in the market. He said he viewed the companies’ products and installed bases as complementary. Open Text will continue to support Gauss users and a soon-to-be-released upgrade will go ahead as scheduled.
“”Gauss will give (Open Text) some functionality in Web and document management,”” said IDC Canada Ltd. software analyst Warren Shiau. “”Eleven million dollars is not a huge amount of money to be paying for a complementary technology.””
RBC Capital Markets analyst David Beck noted that Open Text has been criticized in the past for the quality of its content management product, making Gauss a good fit.
Gauss CEO Ron Vangell — who sat in on the conference call immediately after the company’s annual general meeting — said the Web content management (WCM) space has been hit hard by declining IT spend, and the company wouldn’t be able to survive the two or three years needed for the market to recover. He said it was clear the company wouldn’t make its 30-million euro revenue target for the year. Halfway through the year, the company has made sales of only 10.5 million euros.
“”One of the problems we’ve been faced with over the last 18 months is a poor balance sheet,”” Vangell said. The declining value of the U.S. dollar contributed to a 2.7-million euro loss through the first six months of the year.
Price points for WCM software are also coming down, with Microsoft and other players entering the space, Vangell said.
While German operations focused on Web content management have been suffering, the company’s Irvine, Calif.-based integrated document and output management (IDOM) has posted seven consecutive profitable quarters, according to the company Web site. IDOM systems handle the document management and output needs of enterprise resource planning packages.
Shiau noted that Gauss’s IDOM technology would bundle well with Open Text’s LiveLink content management and enterprise tools. And to some extent, Open Text is buying customers. BMW and USA Today are among Gauss’s 1,100 clients.
“”Gauss has some notable customers,”” Shiau said. “”They may not have a huge position in those big-name accounts,”” but the Open Text connection could open up more business in those accounts, he said.
The Gauss acquisition is a good strategic fit, according to Beck. Open Text is paying less than Gauss’s annual revenue for the company, so it should be easy to show a return on investment. And Open Text — which will still have US$100 million cash on hand after the purchase — has money that needs spending.
“”These companies can’t just sit on their war chests,”” Beck said, because they’re getting nothing in interest. Shareholders want company revenues to turn into more money.
Beck said Open Text is avoiding two major pitfalls of the acquisition business. Mergers often fail because the buyer pays too much, and because integrating the two companies into one entity can be complex. Gauss comes at a good price, and with a staff of 180, is small compared to Open Text.
“”Gauss operations and culture can easily be digested by Open Text,”” he said.
The companies expect to save money by reducing head count, though Jenkins said he wasn’t in a position to be more specific until the announcement of Open Text quarterly results in October. “”We’ll make a lot more colourful comments at that time,”” Jenkins said. But Gauss has already reduced head count in cost-cutting exercises that began in 2001.