An excellent report on Open Text that helps explain OTEXF's acquisition strategy. It reveals:
1. Open Text is imitating the winning strategy of many Silicon Valley successful companies. (achieiving growth by acquisition, building alliance, being market driven...)
2. Open Text builds a strong management team (new president is formerly Vice President of Oracle, A director is an acquisition guru.)
3. Successful acquisition & integration.
4. Last Q exceeded its own expectation
5. Analysts in Canada & US start noticing Open Text recently
6. Open Text stands out as a Canadian high tech company
Overall, a very bullish article (published after Open Text announced its warrant deal). It seems to me the company is trying to follow Cisco and Computer Associate's strategy of achieving rapid growth through acquisition. Wall Street may soon find it is really a undervalued Internet company (with profit and a winning strategy)
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Saturday, March 14, 1998
Open Text on the threshold
Canadian high-tech companies have a bad habit of selling out or faltering on their way to the top. Tom Jenkins says Open Text has the technology, management and strategy to make it the exception
By AMANDA LANG
Technology Reporter The Financial Post
WATERLOO, Ont. - There is no assigned parking in California's Silicon Valley. In the fabled heartland of high-tech a chief executive grabs a spot where he can.
It's a habit they imitate here in Silicon Valley Northeast, a region that is home to some of the brightest stars in Canada's technology firmament.
But what companies such as software maker Open Text Corp. would really like to do is imitate the success of their southern peers, not in developing great technology, which they do well enough, but in becoming truly significant businesses.
There are scores of Canadian technology firms with annual sales between zero and $50 million but, as analysts point out, only a handful manage to grow beyond that on their own. Most are either bought by larger - usually U.S. - firms, or they simply implode.
If Tom Jenkins has his way, Open Text will be an exception to the rule. As the company's 38-year-old CEO lopes across the nether regions of the parking lot in search of his Mercury, he makes his vision plain: Open Text has the right combination of sound technology, management and a strategy of acquisitions and alliances that will make it a major player.
"I'll be with Open Text for as long as there is a company to grow," he says. "This is really exciting stuff."
Part salesman, part executive and part goodwill ambassador (an offhand remark about the Waterloo region results in an instant drive-by tour), he insists his seven-year-old company will soon be able to break through the $50-million mark in revenue and head on to world class status.
For the year ending June 30, he says sales should touch US$45 million, a 100% improvement on the previous year.
The company's market penetration is even more impressive. A year ago, Open Text's Internet-based LiveLink document management products (used to create and control the flow of electronic documents in a company) had 60,000 users. Today, there are more than half a million.
After a bumpy start, the company's stock is flying high too. Priced at US$15 in January 1996, the shares (otexf/nasdaq) slumped to US$4 that year, before recovering to trade recently near a 52-week high of US$21.
Observers say there's no question Open Text has good technology, the single most important element at this stage of its growth.
It was also a good step ahead of competitors in developing its document management software because it based the product on the same structure as the Internet. At the time, rivals were producing software for traditional client-server models of computing.
Marketing was a little rougher. When it started pitching the notion of an "intranet," or internal network designed with the Internet as its base, Open Text found most companies thought it had made a spelling mistake in its literature.
Jenkins laughs about it now, but the confusion was serious, resolved by emphasizing the "ra" with color and italics in the corporate logo, and by educating customers.
"Open Text's technology won't have to change much," says Mark Pavan, an analyst at Yorkton Securities Inc. in Toronto, although the firm will have to constantly fine-tune its products.
Open Text has had no trouble finding bright young recruits. Its head office is in view of the glass-enclosed engineering building at University of Waterloo.
Jenkins has also taken action on what Elan Pratzer, head of executive search firm Pratzer & Partners Inc., says is a perennial issue at young high-tech firms - finding and keeping good managers.
In 1997, Open Text hired several key senior managers, including Brett Newbold, formerly a vice-president at Oracle Corp., as president. Says Pavan: "Tom did a good job of realizing what he wasn't good at."
As well as adding Newbold, Jenkins brought in Stephen Sadler as a director. Sadler, who's noted for his acquisitive flair, is vice-chairman of Geac Computer Corp. Ltd., a company that doubled its revenue by dint of a large U.S. takeover.
Clearly, Open Text hopes to use that expertise and has US$20 million with which to do it. Analysts don't rule anything out, including a purchase of one of its rivals, such as Toronto's PC Docs Group International Inc. or U.S.-based Documentum Inc.
Growth by acquisition can work well, as it has for Geac, or terribly, as it has for struggling Ottawa software maker Corel Corp. (Corel's 1996 purchase of Novell Inc.'s WordPerfect software put it squarely in competition with Microsoft Corp. and now Corel's future looks uncertain.)
Open Text is testing its legs with small acquisitions - eight of them in the past three years. Jenkins says having someone with Sadler's experience makes a real difference. "Ten minutes of conversation can save you weeks of wasted time."
Pavan notes Open Text tends to make acquisitions that bring it customers, rather than simply adding technology. When it bought OnTime software from FTP Software Inc. in December for about US$6.7 million, it picked up 700,000 new customers for its document management software.
But acquisitions can create problems of their own, especially in combining workforces. Jenkins says Open Text has created two internal teams, one to focus on acquisitions, the other on day-to-day operations. Among other things, this approach helps get the most out of acquisitions as soon as possible. OnTime, for example, generated cash flow in its first quarter.
Open Text has also succeeded in keeping costs down while increasing revenue. As a result, the company was several months ahead of schedule in posting its first operating profit. In the second quarter ended Dec. 31, it reported operating profit of US$152,000 (US1« a share) compared with an operating loss of US$1.5 million (US8«) in the same quarter of fiscal 1997.
Revenue climbed 87% to US$9.8 million, from US$5.2 million in second-quarter 1997.
Because it's a market leader in a high-growth sector, Pavan expects Open Text to be able to increase sales by about 50% for the next year or two, before slowing to a comparatively sedate 40%.
What is certain is that Open Text can't sustain an almost 100% growth rate. "It's much more difficult to grow revenue from $50 million to $100 million than it is to grow it from $2 million to $4 million," Pavan says.
Still, the question of how to break through the revenue ceiling lingers. Too many Canadian technology companies, such as Toronto software firm Delrina Corp., mark their success by being bought by a U.S. rival. "If you want to grow to the next stage, you often have to sacrifice your independence," says Mark Skapinker, president of Balisoft Technologies Inc. and co-founder of Delrina. "That is why so many software companies are facing this issue of merging or being acquired."
But plenty of U.S. technology firms of Open Text's stature manage to grow on their own. Some analysts believe it's because Americans are more aggressive in sales and marketing than Canadians, but the reason could be as simple as the fact Americans have a market 10 times as large and they don't have to cross a border or exchange currency to reach it.
Peter Schwartz, CEO of Descartes Systems Group, believes some U.S. corporate customers might also have a natural bias toward U.S. technology firms.
That shouldn't trouble Open Text, which is very American in style. Its stock trades only on a U.S. exchange, so it has always reported its financial results using U.S. accounting methods. Jenkins says 60% of Open Text's staff is located outside Canada and a high proportion of its senior managers are American.
That helps U.S. analysts and U.S. customers understand the company better, and might even help counteract any "made in the U.S.A." bias.
Some technology firms have solved the U.S. market problem by forming partnerships with large foreign firms. For example, Ottawa hardware maker Newbridge Networks Corp. has forged alliances with giants such as 3Com Corp. and Siemens AG.
"The software industry is becoming more and more dominated by a few large and powerful players," Skapinker says, "so it is becoming more and more important to align yourself with the right ones."
Last year, Open Text announced a marketing agreement with Netscape Communications Corp., by which Netscape would distribute a version of Open Text's software when it ships its browser software.
The deal wasn't expected to bring huge amounts of revenue to Open Text, but analysts say it brought the company exposure and credibility, which could be worth more in the long term.
Certainly, the market has decided it likes Open Text's LiveLink software. Since it invented the market for Internet-based document management software, Open Text has dominated it. But rivals, such as Toronto's PC Docs, and U.S.-based Documentum haven't been asleep: all have, or will soon have, competing Internet-based software.
"Longer term, that will mean more competition for Open Text," Pavan says. "But at a certain point you get critical mass and an ability to sustain yourself."
He says analysts, in Canada and the U.S., have begun to notice the company. That is a nice change for Open Text.
"A year ago, you wouldn't have seen Open Text on anyone's list," he says. |
