In a busy year of transaction in the Information Management Automation world, from Hyland’s acquisition of Nuxeo to a host of small deals, one name has been absent, OpenText. The company is the most acquisitive in the sector, racking up well over 50 deals over the years. Their last reported deal was a year ago, in September 2020, when they bought XMedius. Since then, it’s been crickets.
It’s not because they can’t afford to buy as they are flush with cash, their stock is trading at a high, and the company continues to grow organically. I have been following OpenText for many years, and M&A is in their DNA. This is a company that is always on the lookout for a deal, and to their credit, they have made many excellent deals over the years resulting in annual revenue approaching $3.5B and a market cap of over $14B.
So what is going then? Well, in our analysis, there are a couple of things. Firstly, OpenText has always been a bargain hunter; it looks for firms with cash flow that it can absorb, cut costs and quickly boost its bottom line. The market is booming, and bargains are hard to come by in 2021; sellers are looking for premiums that OpenText doesn’t like to pay. The company can afford to wait and see if prices drop, yet paying a premium on a $500m or multi-billion dollar deal is a very different calculation to a $10m or $20m deal; those types of deals are almost petty cash to a company like OpenText.
Though this approach has worked well for OpenText over the years, I have to wonder if they are not missing out. Particularly in terms of innovation. Some innovation comes from cultivating an environment that explores new ideas, just as HP Labs and Xerox Parc did back in the day. But in reality, most innovation is born of necessity, whereby it’s necessary to come up with novel approaches to new problems. OpenText is not known for its innovation. That is not to say it does not have the capacity to innovate, it employs plenty of intelligent people who have the knowledge and skills to innovate, yet it’s not traditionally been in the firm’s DNA. That may be changing though, as this year Mark Barranchea, CEO, pledged an R&D investment of over $1 billion in R&D. That is a good and timely thing, for if the past couple of years have taught us anything, the legacy, largely on-premises market for Information Management and Automation that OpenText is best known for, is under increasing pressure. The enforced seemingly temporary changes to our working environment are increasingly looking permanent. The drive to innovate and adapt to change is now in full swing; RPA, AI, Blockchain are all getting into their stride and will be the technologies that define our future. But OpenText is largely absent in these discussions, though there is an effort to push Magellan AI. So what is interesting here, is that what OpenText is doing is in stark contrast to its nearest competitor Hyland (backed by PE firm Thoma Bravo). Hyland has over the past couple of years acquired a blockchain startup (Learning Machine), an RPA vendor (Another Monday) along with open source DAM/ECM vendors (Nuxeo & Alfresco).
Though I can see the financial logic, to OpenText’s inorganic growth strategy and the reasoning for stepping back from M&A over the past year, there is in our analysis a least, an equally strong argument to say that OpenText should be on a spending spree at the lower end of the market. For example, undertaking sub $20m deals of innovative startups to provide some rocket fuel for longer-term growth. Whatever OpenText decides to do is its decision, and it has made many good financial decisions over the years. But the markets it has long played in are changing fast, and innovation will be needed to stay ahead of the curve, if that $1B is spent wisely it may be the answer, but I can’t help but think that simply buying some innovation, to augment that internal work, might be quicker and cheaper in the long run.