OpenText’s new acquisition is a winner, says National Bank

OpenText (OpenText Stock Quote, Chart, News TSX:OTEX) got good value across all metrics in its new $1.4-billion acquisition, says National Bank Financial analyst Richard Tse, who reviewed the event in an update to clients on Monday.

Waterloo-based enterprise information management company OpenText announced on Monday a definitive agreement to acquire Carbonite, Inc., a cloud-based security software company based in Boston, for $1.42 billion. (All figures in US dollars.)

“Cloud platforms and secured, smart end-points are essential Information Management technologies as businesses transform into Industry 4.0,” said Mark J. Barrenechea, OpenText CEO and CTO, in a press release. “This acquisition will further strengthen OpenText as a leader in cloud platforms, complete end-point security and protection, and will open a new route to connect with customers, through Carbonite’s marquee SMB/prosumer channel and products.”

Tse says the acquisition plays right into his OTEX investment thesis and argues that Carbonite, which currently has annual recurring revenues of 90 per cent, will be accretive to OTEX.

Tse says that the deal represents a strategically as well as financially sound investment for OpenText.

OpenText acquisition of Carbonite is “compelling”, analyst Richard Tse says

“From a strategic standpoint, we believe the transaction is compelling as Carbonite complements OpenText’s current security software portfolio. Even more interesting is the ability to upsell into OpenText’s extensive enterprise customer base where the estimated penetration rate with such security products is around 10 per cent,” writes Tse.

“With a broad set of security and data protection products, Carbonite brings an extensive SMB and prosumer channel of 14,000 MSPs, 300,000 SMB customers, 50 million end-points and 7 million prosumers. As such, we could definitely see revenue synergies following this transaction – as we think Carbonite’s security products have the potential to travel across ALL of OpenText’s customer base of 74,000. In addition, Carbonite further builds on OpenText’s increasing cloud strategy with 90 per cent of Carbonite’s revenue-recurring cloud subscriptions,” he writes.

The analyst says the deal, which will be financed with cash and debt, appears reasonably value at 2.8x full run-rate trailing 12 months revenue and 11.4x EV/EBITDA, with an expected closing date within 90 days.

Tse says there’s a less obvious benefit to the acquisition, that Carbonite could enable OTEX to tap into the formers extensive SMB partner channel for OTEX’s existing products.

“OpenText has historically been an enterprise (not SMB) software play. With an added SMB partner channel, it opens up the potential for OpenText to build a meaningful SMB revenue stream. This is particularly relevant as OpenText has opened up its product stack into those potential SMB customers in recent years as it has made those products available in the OpenText Cloud,” Tse writes.

While planning to update his estimates once the deal closes, Tse says that in the meantime he is keeping his “Outperform” rating and $50.00 target price for OTEX, which represented a projected 12-month return of 20.5 per cent at the time of publication.

OTEX climbed two per cent in trading on Monday, while year-to-date the stock is up 30.7 per cent.