Should Optisystems founders Gerry Frankel and Noah Perlman be satisfied? It depends how you look at it. On the one hand, US company BMC paid $70 million in cash in order to absorb their baby, which is nice, particularly in view of the Nasdaq slump. If you examine Optisystem's public record, however, the sale to BMC is not exactly a big deal.
Optisystems is one of the lesser known public companies on Nasdaq, although it was founded at the beginning of the 1980s. The company aspired to the title of technology leader in the field of software management systems for organizations, but didn't go far. In 1999, for example, the company sold "only" $5.9 million and lost $2.7 million. The company's results didn't really improve in the first quarter this year - sales totaled $1.3 million and losses were $1.1 million. In short, the record is nothing to be proud of.
The company turned public in June 1997, raising $7.5 million at $7.5 per share. As with any unrealized dream, the disappointment was translated into a sharp fall in the share price, which hit a low of $3. The company's share woke up last year, following the Nasdaq boom, reaching a peak of $13. Optisystem's share fell to $7-8 after the recent drop in Nasdaq, and after the sale of the company closed at $9.4 yesterday. The transaction, incidently, reflects a share price of $10.
If all goes as planned, BMC, one of the world leaders in the management systems field, is expected to merge Optisystems into its local branch, BMC Israel. BMC's Israeli branch is actually New Dimension, a company acquired in March 1999 for $650 million in cash. The US company is traded at a value of $10.7 billion, and has sales of $1.7 billion in the last four quarters and profits of $242 million.
Judging by the success of New Dimension since it was sold, Optisystems has room for optimism. New Dimension increased its sales by 70%, reaching the considerable level of $60 million since the merger with BMC. Optisystems vice-president and development manager Noah Perlman expects a similar development with "his" company.
"Globes": So why did you sell, actually?
Noah Perlman: "Optisystems has a marketing problem. We needed marketing channels to get us to the large customers, and I think that BMC will bring our products to all the customers."
Why didn't you invest by yourselves in establishing marketing channels or sign marketing agreements with large concerns, like BMC?
"We made a lot of mistakes, and we needed a large body to conquer the market. As of tomorrow morning, 1,500 BMC salespersons will be selling our product. You can't break into the market when you're an unknown Israeli company. Look at every case of success, for example Check Point and Memco. They only succeeded through marketing cooperation with the giants.
"BMC wouldn't agree to a marketing agreement. If they had, we would have become a $500 million company and they wouldn't have benefited from our improvement. They would only agree to complete acquisition."
Does it sound like a cheap price in relation to the potential?
"Yes. BMC made its best deal. Sales in 2000 were expected to be around $10 million, and now that can be doubled. Next year sales can reach $50 million. At the same time, a trap exists. The potential is there, but without proper marketing channels, it cannot be realized."
Let's get back to Optisystems. What does your technological advantage consist of?
"Optisystems manages SAP software and database management systems in the most effective way. Our advantage is in technology. All the competing products can only find the problems in the system; we solve the problems."
Who are your largest customers?
"We have a number of large organizations. For example, Lucent, Nortel, and Goodyear."
A year ago BMC acquired New Dimension, which became BMC Israel. It's natural that you become part of it.
"It looks like that's what will happen. In the first stage, however, we will function, as I said, as a separate entity, except for inserting our products into their basket of products. In the next stage, I assume that we will be partners in the local development center, but the structure and the route are still unclear."
The structure that Perlman is talking about is very clear, at least as far as BMC Israel general manager Dan Barnea is concerned. He says that Optisystems will be one of the company's four Israeli divisions. "We will accept it as our fourth division, but meanwhile there are no immediate changes."
Do Noah Perlman's forecasts of $20 million sales this year and $50 million next year sound feasible to you?
Dan Barnea: "I believe that growth will accelerate. We're taking about tripling or even quadrupling sales. I assume that a target of $20 million sales for next year is feasible."
Let's get back BMC's first acquisition, New Dimension. What has happened to the company since then?
"From BMC's point of view, the deal looks very good. Our products are responsible for revenues of $161 million, which is 10% of the group's sales. By the way, New Dimension's revenues have grown by 70%, compared with the year before the merger.
"Next year we will provide 15% of total group sales, so the deal looks very good where BMC is concerned. At the same time, some things in this period were unsuccessful, and we're now working on fixing the problems. We hope that next year will be more successful."
Fifteen percent of the group's expected sales of $2 billion is $300 million.
"That's right. It will reach about $300 million, but no more than that."
BMC reported poor results for the quarter ending in December 1999, and the share accordingly dropped by 50%. Was New Dimension a party to the fall in business activity?
"The group reported disappointing results in this quarter. Results improved in the following quarter, however, compensating for the drop in the previous quarter. On a yearly basis, New Dimension is exceeding all the forecasts, but in the poor quarter we stumbled like all the rest, although to a lesser extent than they did."
You spoke about problems with the merger. What were you referring to?
"We are currently working at fixing those problems. The problems were in the marketing and sales department. In some areas of the world, integration wasn't so successful."
What is Optisystems's biggest advantages?
"Our group's expertise is in various management systems. Optisystems specializes in the narrow niche of management systems for SAP users. SAP is a very successful company in the organizational systems field. Some say that the recent boom will be followed by a bust. In our opinion, however, sales of management systems for SAP products will grow. It takes a lot of time for these systems to penetrate an organization. Only after the systems are purchased and implemented do the organizations buy the management products. I predict that the next year or two will see record sales."
Will BMC buy additional Israeli companies in the field?
"The BMC group has a business development division, whose job includes mergers, among other things. We are constantly looking at and examining companies in complementary fields, but there is nothing concrete at the moment. At the same time, we are expecting the group's business development head to visit Israel in the near future, and he will doubtless meet with a number of companies."
Published by Israel's Business Arena on May 25, 2000