Veritas Grabs the Horns

Did Veritas Software Corp. (Nasdaq: VRTS) pay over the odds for Precise Software Solutions (Nasdaq: PRSE) this week? Half a billion dollars for a niche software company in this climate – with no sign of an uptick in IT spending next year. What's that about? (See Veritas Gets Precise.)

As it turns out, rather than burying its head in the sand and lying low until the IT market and the economy fully recovers (and we colonize Mars), Veritas is taking the bull by the horns and making its own market happen.

¡Ole!

Most Wall Street analysts seem to agree the deal makes perfect strategic sense for Veritas. "The application performance management market is directly related to Veritas's core businesses, allowing for significant product and sales leverage," says Jason Ader, analyst with Thomas Weisel Partners. "The inherent sales leverage outweighs the 37 percent premium paid for Precise, in our view." Precise was bought for 4.2 times its estimated 2003 revenue and 40 times estimated EPS (earnings per share).

We're stating the obvious here, but never mind. For acquisitions to occur, the acquirer has to be convinced there is a market for the goods it's buying. Why buy a company if you can't sell its stuff, right?Precise Software has 6,000 customers, has increased its revenue for 20 consecutive quarters, and is comfortably profitable. For its third quarter, ended Sept. 30, 2002, Precise reported net income of $1.1 million on sales of $19.4 million, compared with net income of $452,000 on sales of $14.3 million in the same period last year.

And the goods for sale? Application performance management (APM) software, which monitors and analyzes all the vital components of an IT infrastructure, from servers, storage, and applications, to root out performance degradation before it affects response times.

In a spending crunch, just about the only thing CFOs are willing to loosen the purse strings for is technology that makes the existing infrastructure work better. Precisely what Precise does. [Ed. note: All right, all right, could you be any more gushing?!]

That said, there's always the possibility that Veritas could botch the integration of Precise's products and staff. But my hat's off to CEO Gary Bloom for getting the deal done.

Meanwhile, note that Mercury Interactive (Nasdaq: MERQ), a competitor of Precise, trades at around five times its 2003 revenue forecast. It's safe to say APM is sizzling hot. Mercury, currently trading at $30 and change, reported revenues of $282 million for the first nine months of 2002, and CEO Amnon Landan expects annual sales to grow to $1 billion in three to five years. Another takeover target in the wings, surely?Aside from signaling that APM is one of the next big growth areas, Veritas's acquisition also suggests that vendor consolidation and infrastructure optimization will be important themes in 2003.

It will be key for storage management software vendors to adopt an "application-centric" focus in their products, which will enable managers to see what storage resources are associated with each application.

Will EMC Corp. (NYSE: EMC) realize this next year? It still doesn't have much of a software sales force to speak of. Perhaps Legato Systems Inc.