This week, Autonomy announced that it will acquire Verity for $500M in cash or $13.50/share, about a 30% premium over Verity’s recent trading price.
First, a few facts on size:
- Verity has a lot more employees than Autonomy, maybe 2x. Verity has 554 employees per this source. I had trouble getting a precise number for Autonomy, but as of their last annual report (12/04), the number was “over 200.” As we’ll see in a minute, Autonomy’s revenues have actually shrunk from 4Q04 to 3Q05 so you would suppose they haven’t been hiring much, so it’s safe to assume that they are somewhere between 200 and 250 headcount at present.
- In their most recently-announced fiscal years, Verity is a lot bigger than Autonomy, about 2.2x when comparing Verity’s $143M to Autonomy’s $65M.
- Based on their most recent quarters, Verity is about 1.4x larger than Autonomy. In its 1Q06, Verity had revenues of $35.5M and growth of 2%. In its 3Q05, Autonomy had revenues of $25.4M and growth of 76%.
Netting it out, Autonomy is about 60% Verity’s size (weighing revenues and staff). Yet, Autonomy is acquiring Verity and not the other way around. Since superior growth seems to account for how the little guy bought the big one, let’s examine the story behind Autonomy’s recent growth.
- 4Q04: 10% over prior-year-quarter of $16.9M
- 1Q05: 12% over PYQ of $16.4M
- 2Q05: 34% over PYQ of $15.2M
- 3Q05: 76% over PYQ of $14.5M (some inorganic growth is included here due to etalk acquisition which is rolled into the numbers as of 6/3/05.)
Two things scream out when looking at this data:
- On Wall Street, this is what’s known as “easy comps” (i.e., comparables). For the four prior-year-quarters Autonomy was shrinking monotonically.
- Despite this growth tailwind, the 76% rate seems much more an instantaneous growth rate than a sustained one.
So the deal starts to look like a marriage of convenience. It may not be love, but it does appear to solve problems for both companies.
- Verity’s problem was growth. While it was the clear market share leader, it was basically stuck, unable to generate growth, recovering from its failed “intellectual capital management” play and its attempt to get into business process management.
- Autonomy’s problem was size. It takes a long time for a $25M (per quarter) company to become a $35M one, let alone a $60M one. By exploiting the momentum from their recent growth they could buy their way into size.
- Both companies are afraid of Google. Although enterprise search and Internet search are actually two different problems, many people will simply want to Google inside their enterprises just as they Google outside them. That, plus some aggressive marketing spells trouble for enterprise search companies. While acquiring Verity doesn’t eliminate this problem, there is some comfort in huddling together in the face of the storm.
The marriage of convenience hypothesis is confirmed by one simple fact: cash. Verity shareholders don’t believe in the future of the combined company. If they did, they would have taken all or part of their payment in shares, not cash.
Having participated in several acquisitions, both large and small, I believe that integration is going to be very difficult for Autonomy. Here’s why:
- National cultural differences — UK vs US. There’s more to this than saying behavior vs. behaviour.
- Company cultural differences — technical PHD leader in Mike Lynch vs. sleeves-up, eminently likeable, and profit-focused salesguy in Anthony Bettencourt.
- International inversion factor — it’s easy for US companies to hire “country managers” in Europe because that’s “normal.” As we learned at Business Objects, it’s very hard to do it the other way around. So hard, in fact, that most of the Business Objects executive team moved from Paris to San Jose between 1997 and 2000 and remain in San Jose to this day.
- Size inversion factor — it’s hard enough when a big company buys a little one. Square that difficulty when the acquiror is 2/3rds the size of the acquiree.
- Enemy factor — these two companies are competitors, despite recent protestations that were indeed actually complementary all along and that somehow no one actually noticed.
In the end, I think this deal will be good for Mark Logic.
- It establishes a clear leader in the enterprise search space. (FAST becomes a distant #2 at about 40% of the combined Autonomy/Verity and no longer gets to enjoy easy growth capitalizing on Verity’s woes.)
- It ties up that leader with a year or two worth of tricky merger integration.
- It should focus FAST and Autonomy on each neutralizing each other’s bells and whistles, and presumably neither on improving XML search, XQuery, or Mark Logic.
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