OpenText’s acquisition of Actuate gets thumbs up from Cormark

Open Text’s (OpenText Stock Quote, Chart, News: TSX:OTC, Nasdaq:OTEX) pickup of Business Intelligence and Reporting Tools player Acutate may not seem like a bargain at first glance, but potential synergies from the deal can create value, says Cormark analyst Richard Tse.

On Friday, OpenText announced it had entered into a definitive agreement to acquire Actuate for $6.60 a share in cash in a transaction valued at approximately $330-million. OpenText said it expects the deal, which has been approved by both boards, will close in the third quarter of its fiscal 2015.

Tse says the acquisition of Acutate is “textbook OpenText”. He says the company’s growth through acquisition strategy has paced its growth for seven years. While the analyst thinks the might not look like a slam-dunk win at the outset, he thinks it will create value.

“OpenText is paying 2.5x sales but on forward consensus estimates, it looks closer to 3.1x.,” says Tse. “While it may not appear to be a bargain, we believe the potential synergies from this deal are value creating for OpenText even with Actuate’s recent challenges.”

Tse says he doesn’t think the market is fully pricing in this acquisition, nor the company’s organic growth initiatives into the stock.

And while Acutate has struggled with a business model that has transitioned from perpetual to subscription licenses and from general challenges in the market, the analyst says the fact that OpenText hasn’t always gone after market leaders simply hasn’t hurt its ability to derive value from them.

In a research update to clients this morning, Tse maintained his “Buy” rating and one-year target of $70.00 on OTEX.