Rocket Software Inks Deal to Buy Seagull Software
by Timothy Prickett Morgan
What do you get when you cross a rocket with a seagull? Newtown, Massachusetts-based Rocket Software, which has been on an acquisitions tear for the past few years as it builds up its software business, is about to find out. Rocket last week announced that it was willing to spend more than $55.7 million to acquire Seagull Software, a provider of host connectivity and SOA-related middleware tools for mainframe and i5/OS platforms.
The acquisition is yet another big deal in the i5/OS and OS/400 ecosystem. Software companies from outside this market have been swooping in to take over players--such as the recent acquisition of software change management specialist SoftLanding Systems by mainframe tools vendor Unicom Systems.
Still others have been taking over each other within the i5/OS and OS/400 ecosystem, such as when systems management software provider Help/Systems bought database tool maker Advanced Systems Concepts.
Then, of course, there is the private equity investment coming in from the outside, such as Thoma Cressey Equity Partners's acquisition of both Vision Solutions and iTera and their merger into one company, or the acquisition of host connectivity software provider WRQ's acquisition by Golden Gate Capital, Francisco Partners, and Thoma Cressey, and the follow-on deals to buy Attachmate and NetIQ to create a very much larger Attachmate. And then there is the equity investors behind the creation of ERP powerhouse Infor, which is backed by Golden Gate Capital and which has eaten MAPICS, SSA, Baan, Geac, and a hoard of other software players to create a $2 billion behemoth.
The Rocket-Seagull deal is a bit like the Unicom-SoftLanding deal in that it marries a specialist with a strong mainframe background with a big player in the System i5 market; moreover, Rocket Software has done a lot of acquisitions in the past couple of years--more than Unicom, in fact. Conceptually, even though Rocket Software is not a private equity firm, but rather a software company with strong ties to the Route 128 technology corridor outside Boston, it has not been shy about growing its business through acquisitions, just like private equity firms are not being shy about that these days.
Rocket Software is probably not very well known in the i5/OS and OS/400 community. And even outside that community, it is not all that well known because a lot of its business is done on an OEM basis with some of the big names in the IT sector. Rocket Software was founded in 1990--the same year that Seagull Software was founded in Amsterdam, the Netherlands--and got its big break in 1994 when it was picked as a development partner by IBM, which licensed software from the company to make the Query Management Facility on mainframes better.
Rocket Software kept a low profile in the end user community for a number of years, establishing partnerships with IT players and developing tools on an OEM basis. Today, Hewlett-Packard uses Rocket Software to extend OpenView; EMC uses the company to provide backup and restore on mainframes of DB2 databases; RSA Security (which was just acquired by EMC this summer) partnered with Rocket Software to provide additional mainframe security products; CA did much the same with its own eTrust security products for mainframes; and Embarcadero Technologies (which is in the midst of being acquired by Thoma Cressey) hired Rocket Software to extend its DBArtisan database administration tools for Oracle, Sybase, and SQL Server databases to IBM's mainframe variant of DB2. There are many other such partnerships.
Rocket Software is a privately held company, and does not provide financials. Nor does it say where it is getting the cash from to buy Seagull, but its statement on the acquisition did say that the company's financial institutions would have to approve the deal to buy Seagull, which seems to imply that there might be some equity companies or loan facilities backing this acquisition.
What we do know is that Rocket Software has 350 employees and has offices located all over the globe, many of them coming from acquisitions. According to Kim Addington, executive vice president and chief marketing officer at Seagull, Rocket Software has development labs in China and Russia, and the Seagull team is looking forward to being able to leverage their expertise to enhance products. Seagull has its own development teams in its Holland headquarters; in Montreal, Quebec; and in Virginia and Oklahoma in the United States. Seagull's main office in North America is located in Atlanta, which is where a lot of AS/400-related software businesses started out.
Seagull is traded on the Euronext small cap stock market, and anyone who watches the capriciousness of investors has to admit that this is not an easy market in which to be a relatively small software vendor. Which is why so many software companies are eager to be acquired these days--particularly if they can be taken private again, as the Rocket Software deal would do for Seagull. And the offer is relatively generous, too, which is why Seagull's shareholders will probably go for it.
Seagull's stock was trading at around 3.50 euros at its peak this year, back in late March, and the stock was sliding down toward 2.00 euros by November. There was a brief spike when the company's financials came out, but it headed right back down after profit taking, giving Seagull a market capitalization of around 18.8 million euros (roughly $24.8 million at current exchange rates). After the deal was announced, the company's market cap rocketed up to 38.8 million euros (or $51.3 million). Rocket Software has promised to pay 4.68 euros per outstanding share of the public float as well as an unspecified number of stock options, which have not been valued yet. Just the public stock alone is worth $55.7 million; the additional amount Rocket Software will pay is anyone's guess. The point is, the value is a lot higher than the market cap was a week ago.
It is also a generous price considering that Seagull has only recently become a profitable company. It lost money in its fiscal 2003, 2004, and 2005, but in fiscal 2006 it was able to eke out a small pro forma profit of $193,000 on sales of $27.7 million. (Seagull Holding, the parent company back in Holland, has a fiscal year that ends in April.) However, the company still lost $937,000 when all of the numbers were counted. In the first half of fiscal 2007 ended in October, Seagull had sales of $15.7 million and a net loss of over $1 million.
With Seagull losing money, you might be wondering why Rocket Software wants to buy it at what will probably end up being a value very close to a full year's revenue. For one thing, Rocket Software might have twice as many employees as Seagull has, but it does not have anything close to the 10,000 customers that Seagull has. Moreover, Seagull has working ERP, supply chain, and customer relationship management systems to service a large number of customers, and this is of value. Rocket Software does not have much of a presence in Europe, and wants one, too. But there is more to it.
"Rocket Software is a strategic acquirer. They are not a financial acquirer that comes in and strips out everything but the maintenance stream," explains Addington, whose husband is Don Addington, Seagull's president and chief executive officer. "They vie