KUHN CAPITAL Wednesday, December 13, 2017
Dispatches from the front

What Comes Around
(7/5/2005)

July

Here’s an update on four tech/professional services companies whose adventures we’ve cataloged for you before -- AT Kearney, Sun, Oracle and Computer Associates. We watch them because we think they’re bell weathers of developments in their industries.

AT Kearney
First is the saga of consultancy AT Kearney. It’s said that once a company enters into widely-visible M&A “play,” it ends up doing a deal, whether or not with them that brung it to the dance. And so it is with Kearney, rumored a few months ago to be haggling over the $600M that its parent, EDS, wanted from a Kearney management buyout after an auction failed to attract bidders. Now EDS is in discussions with prospective Kearney buyer Monitor Group. See this article for background on EDS’ apparent interest in divesting Kearney.

To us, the fit looks good. Despite Kearney’s much larger size (about $800M versus Monitor’s $300M), the company’s sales dropped 5% last year and losses have accelerated from $7M in 2003 to $10M in 2004. All this in a friendly economic environment.

So Kearney needs industry-specific turnaround attention best provided by a successful management consultancy player like Monitor. Founded by Harvard Business School management guru Michael Porter and populated by HBS grads, the fast-growing, profitable and entrepreneurial Monitor ought to be able to pick up Kearney at a distress price (that is, less than the $300M EDS paid for it), then right the listing ship. It’s doctor, heal thyself.

Sun
Another player applying M&A as Rx is Sun Micro, which recently announced its $387M cash purchase of SeeBeyond, a vendor of computer system integration software. The move is consistent with Sun’s recent drive to extend its reach from network servers into other faster growing or at least more profitable network technologies. See our earlier blurb on Sun’s buy of StorageTek for detail on Scott McNealy’s initial execution of this diversification strategy. Sun still has enough room on its balance sheet to do a few more such deals.

Oracle
Larry Ellison, with characteristic directness and energy, has been making good on his assertion that the software business is mature and begs for consolidation. He’s leading that parade himself, with 14 acquisitions since 2001, eight of those closed or announced since he declared pursuit of PeopleSoft in 2003.

Oracle’s latest targets are NetForce, a pharma clinical trials applications vendor whose sale is slated to close in January, and ProfitLogic, a $45M Cambridge, MA-based publisher of software used by retailers to forecast sales and manage merchandise pricing.

Just June 20, Oracle bought TimesTen, value undisclosed. TimesTen vends infrastructure software that manages events, transactions and data for telecom, networking, and securities trading clients.

Computer Associates
Shortly after we had written about how hyper-acquisitive CA seems gifted with the ability to shrug off one scandal after another comes word of yet more layers to the onion. On the same day, June 30, that a US attorney filed indictments against former CA president Sanjay Kumar, new CA management finally filed its delayed March, 2005 annual report.

The document details how long and deeply the corruption and cronyism had crept, going back to 1998 and reaching into CA’s European, Asian and the Middle Eastern operations where “conflicts of interest” have resulted in terminations and re-assignments. Ironically, since much of the number-fudging had to do with accelerating sales recognition in early years to pump stock value and executive bonuses, the effect of restatements has been to increase profitability for recent periods: for example, for FY 2005, income from continuing operations was $1M more than previously reported.

Ah, to party like it’s 1999. That was when Computer Associates really got big mo by buying software agglomerate Platinum Technology for a titanic $3.5B, thereby freeing Platinum CEO Andrew “Flip” Filipowski to visit upon hapless investors his dotcom fiasco, divine. We hope CA’s latest restatements are our last memories of those carney-man times.

Ryan Kuhn


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