Yesterday, BMC Software (BMC) announced the acquisition of Identify Software in an all-cash transaction valued at $150 million.
Identify was founded in 1996, but the company brought in most of the current management team in 2000-2001. At the helm is Yochi Slonim, the founder of Mercury Interactive (MERQ), who joined Identify in 2000 after several years at Tecnomatix (TCNO).
Identify's AppSight solution monitors transactions in real-time and creates a log file of any recorded problem down to the root cause level. By providing a time-based roll up of all the components of a transaction at the time of failure (including database calls, code exceptions, user actions, network-level events, etc...), Identify seeks to dramatically reduce time to resolution.
BMC is Playing Catchup
All due respect to Forrester Research's take, I personally see this acquisition as very much a "me too" purchase. While Identify has some credible production environment customers to its credit, its AppSight product is primarily for non-production environments. According to Gartner's March 2005 Magic Quadrant for J2EE Application Server Management, Identify was in the middle of the "Visionary" pack while CA/Wily was THE leader and Mercury also resided in the leadership quadrant.
Let's not forget that this company has been around for a decade and is just now approaching the $25 million revenue run rate. 60% YOY growth or not, that's hardly indicative of a company with an indefensible market position. By comparison, Wily [acquired by CA in January] generated a little more than $50mm last year and guided to 70% YOY growth at the time of the CA merger.
Did BMC overpay?
At $150mm, BMC is paying 6x forward revenues, more than CA paid for Wily and more than most software M&A transactions have been going for. There was also no indication this was a competitive bid (although it may have been) as CA and Mercury already have solid products in the sector.
As with all acquisitions, we really won't know whether BMC "overpaid" for some time but based on the metrics we've got at our disposal, it's clear BMC desperately felt the need to buy some time back on the R&D curve and was willing to pay a premium for it.
ComputerWorld quotes BMC CEO Bob Beauchamp...
"The reason we are buying Identify is, we couldn't figure it out. They figured it out before we did," Beauchamp said.
But does this deal REALLY bridge the gap relative to IBM/Rational, CA/Wily and Mercury? That's a big leap to make. BMC spends more than $200 million per year on R&D, yet they couldn't "figure out" something a niche J2EE monitoring vendor has been doing?
A Non-Sequitor From CIBC
Amid all the reports on this transaction from 3rd party research houses, investment banks, bloggers, etc...the most interesting commentary came from Shaul Eyal, an sell-side analyst at CIBC covering Israeli technology companies.
Past speculation had deemed MERQ the target of a possible acquisition by the likes of Computer Associates, BMC Software, IBM and others. BMC's acquisition of Identify Software earlier this morning, however, likely takes it out of the mix for a possible MERQ acquisition.
To be clear, Shaul isn't alone in his views here, and plenty of my buyside colleagues have bandied about BMC's name as a potential acquirer for Mercury. But I really don't get Shaul's line of reasoning here for a lot of reasons.
1) Why would Mercury accept a buyout from BMC in the first place? -- Mercury has undergone quite a year (delisting, ouster of key senior management) and they're not out of the woods yet from a SEC compliance aspect. However, despite that, the company continues to execute quite well in the field and industry analysts point to zero customer push back in terms of Mercury's market position. Mercury may, in the interest of shareholders, entertain merger discussions but I don't see how BMC would pass muster. BMC has a $4.5B market cap; Mercury (despite being delisted) has a 2.9B market cap and is (and has been) growing much faster organically. In BMC's most recent Q, license bookings were down 11% YOY with nearly every product line seeing negative YOY comps. Mercury has a very high competitive win rate against BMC in the areas they overlap; and where BMC does not overlap (i.e., broad systems management on the mainframe and client/server) is a maturing market.
2) Even if BMC was interested in acquiring Mercury, why would the Identify deal preclude that from happening? -- Let's say I'm wrong and there is/was material interest from both Mercury and BMC on a merger. Why on Earth would BMC's acquisition of a $25 million J2EE transaction monitoring company preclude a deal from happening? Mercury is a $1 billion leader in application performance management and pre- and post-production testing. Eyal's logic here is akin to saying a car enthusiast was no longer interested in acquiring a McLaren because he just got a sweet deal on a hubcap.
Ultimately I think this acquisition makes sense for BMC, but it doesn't strike me as a game changer, at least in the near term. BMC has plenty of work to do, and let's not forget that HP is hovering out there looking to bolster its own software presence. Niel thinks HP could look to buy a Identify competitor, but I wonder if it doesn't have its sight set on something bolder like Quest or Mercury (which is not to say either of those vendors would be willing to sell).
I'd love to hear your thoughts on this transaction. Do you agree with my dismissive assessment or is there more to the Identify offering than I'm portraying?
Related Articles:
- Niel Robertson's View
- Forrester Quick-Take
- CA = Wild about Wily
- Private Company Spotlight: Wily Technology
- Ovum's Take
Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained a long equity position in MERQ but did not maintain a position [long or short] in BMC, CA, IBM, QSFT or TCNO.
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BMC may very well have overpaid. Their problem was that not only did they need to buy technology, they needed to buy some market presence as well, and Identify was the last fish in the pond with any traction.
The other loser in all this is Acsera, which has a J2EE solution, not much traction, and no longer has any potential acquirers!
Posted by: Hon Wong | March 29, 2006 at 06:52 PM