Micro Focus snags Relativity for $9.7m

Consolidation in the legacy application rehosting and modernization software space continues apace, with compiler and rehosting expert Micro Focus announcing yet another acquisition. This time, it's shelling out $9.7m in cash to pick up Relativity Technologies, one of its competitors in the IBM mainframe and midrange server spaces.

After struggling a few years back, Micro Focus has done what its name suggests, focusing not just on improving its products but on acquiring a lot of its competition and locking up the COBOL market as much as a software company that doesn't have its own mainframe or midrange gear can.

In July of this year, Micro Focus paid $5m to acquire Liant, the maker of the RM/COBOL compiler and related tools and the Open PL/I compiler. In May, Micro Focus forked over $73.3m to acquire NetManage, a maker of legacy application modernization tools that Rocket Software tried to buy at the end of 2007 but could not because it could not raise the capital to close the $69m deal.

Because NetManage was sitting on $25.4m in cash, Micro Focus was able to pick up NetManage for about $48m, and the company has a maintenance revenue stream of about $22m a year, so this was a pretty sweet acquisition for Micro Focus. Perhaps not as good as Acucorp, a rival COBOL compiler and tool maker, which Micro Focus acquired in May 2007 for $40.7m.

Micro Focus is a publicly traded company, with its shared traded on the London Stock Exchange and is a component of the FTSE 250 index. The company nonetheless reports its financials in U.S. dollars. In the prior fiscal year ended April 2008, the company reported sales up 33 per cent to $228.2m, with about half of that growth coming organically and half from acquisitions. The company generated $96.2m in cash from continuing operations and had most of that available as cash to make deals.

In early November, the company wanted to make sure everyone knew that Micro Focus was weathering the economic storm and said that it expected sales in the first half of fiscal 2009 (through October 31) in the neighborhood of $135m, which represents about 11 per cent of organic growth not including the effects of acquisitions. The company reports its official financial results for the second quarter tomorrow.

Relativity has over 400 customers using its Modernization Workbench tools to update COBOL, PL/I, and RPG applications and make them Web friendly and to integrate them with other applications. Before the acquisition binge at Micro Focus started, the company claimed to have 15,000 customers and over 1 million licenses, and despite acquisitions that have added many thousands of customers, these are still the stats that Micro Focus cites about itself.

The acquisition, which has been approved by the companies of both boards, is expected to close before December finishes, and Micro Focus said in a statement that ignoring amortization of intangible assets and one-time integration and restructuring charges, the Relativity acquisition will enhance its earnings, not diminish them. The company's did not say what the revenue stream is at Relativity, or how large its profits were. Nor have the two said anything about what will happen to Relativity's 100 employees or how the Modernization Workbench will be integrated into the Micro Focus product line.

According to a report in the Raleigh, North Carolina Triangle Business Journal, you can chalk this one up to the economic meltdown. As it turns out, Relativity has a lot of venture backers, including Wachovia Strategic Ventures (the venture arm of the troubled North Carolina bank based in Charlotte that is in the process of being eaten by Wells Fargo). Intel, CEC, Noro Moseley Partners, Sojitz, Tall Oaks Capital Partners, and Wakefield Group have also kicked in dough to help Relativity build up its business.

The TBJ report cites Stephen Maysonave, the company's chief executive officer, saying that Wachovia could not lead another round of financing, which was needed by Relativity, and with the economic downturn here in the States and spreading in Europe, the company was caught in a squeeze. Relativity gets about half of its sales from financial services firms looking to modernize their apps, so when the economic meltdown hit, the company was hit disproportionately harder than many other software companies have been.

Niches are great when times are good, and they can be very limiting when something goes awry in that niche. ®