The preparations by Mercury Interactive Corporation (Nasdaq: MERQ) for acquiring a company are gathering momentum. Two senior vice presidents, VP corporate development David Murphy, responsible for mergers and acquisitions, and VP alliances Harry Gould, are currently working fulltime on acquisitions.
Mercury Interactive had $527 million in cash as of December 31, 2002. An acquisition candidate fulfilling all of Mercury Interactive’s criteria will probably cost at least $200 million. In view of the criticism leveled at Mercury Interactive chairman, president and CEO Amnon Landan, following the acquisition of Freshwater Software for $147 million in May 2001, it’s reasonable to assume he will prefer not to buy a company that costs more than $500 million.
The acquisition price depends on the size of the company being acquired, its market share, annual revenue, technology, and, above all, the capacity of its products to further Mercury Interactive’s business technology optimization (BTO) strategy. Anyone who has observed Landan’s record as CEO over the years will realize that he is very cautious. It is therefore probable that he’ll be interested in a company that has a good cash flow, and is already making a profit. There is no chance he will make an acquisition that is too risky or too expensive.
Considering Mercury Interactive’s cash reserves, the company will probably seek to raise several hundred million dollars in convertible bonds before it makes an acquisition. Raising money through a share issue would dilute its current shareholders, which Landan usually does not favor.
It was reported on Monday that Mercury Interactive was considering the acquisition of US company Quest Software (Nasdaq: QSFT), whose business resembles that of Freshwater. Actually, almost all of Quest’s products are very similar to those of Mercury Interactive; one example is checking bottlenecks.
The only product of interest to Mercury Interactive is a system for monitoring databases. If Mercury Interactive is very interested in Quest’s technology, it might be willing to pay $50-100 million for the company, or, at the absolute most, as much as $200 million. Quest’s current market value, however, is $817 million. By the way, the Quest share’s uninterrupted decline over the past month indicates there are no rumors of a possible acquisition, at least not on Wall Street. That does not mean, of course, that this acquisition is not under consideration.
In any case, if Mercury Interactive is not planning to acquire the specific Quest division responsible for database monitoring, there is no clear reason for the acquisition. Furthermore, the technology’s contribution to Mercury Interactive’s basket of products is not particularly large, and its contribution to its strategy is dubious. The high price is liable to draw devastating criticism from the capital market, even if the deal is a share swap. It is very hard to believe that Landan will be willing to face such criticism.
In addition to the cost-benefit ratio, i.e. the ratio of the acquisition price to the acquired company’s contribution to Mercury Interactive, there is also the technology-business aspect to consider. The statements in recent months by Landan and Mercury Interactive president EMEA Moshe Egert indicate that Mercury Interactive is looking for a company with a substantial market share, complementary technological capabilities, and, above all, one that can help Mercury Interactive penetrate the BTO field.
Quest is incapable of contributing to Mercury Interactive’s market share. Mercury Interactive already sells to almost all of Quest’s customers; most of them already work with Mercury Interactive. In other words, Quest will not provide Mercury Interactive with a springboard for a new field and new customers.
Quest has a database monitoring tool, which can be considered as complementing Mercury Interactive’s business. It is not clear, however, that this is the direction in which Mercury Interactive wishes to go. Furthermore, Quest offers probes that monitor applications, a field in which Mercury Interactive already operates. In short, Quest has virtually nothing to offer Mercury Interactive in market share or complementary technology.
The third, and possibly decisive point, is the acquisition candidate’s contribution in the BTO field. All of Mercury Interactive is currently gearing up for a major effort in this field. A reasonable assumption is that part of this effort will be a search for an acquisition that will provide solutions to position Mercury Interactive high on the food chain. The solutions involve include control, monitoring, and optimization, which extend throughout the entire length, and especially breadth, of an enterprise.
Mercury Interactive is probably interested in a company offering measuring and control tools for business operations, which can be used throughout the entire breadth of an enterprise. As part of this strategy, Mercury Interactive aspires to offer testing capacities for processes that generate revenue and profits. The idea is to focus on business processes, and monitor and optimize them.
For that reason, it can be assumed that Mercury Interactive will focus on companies providing solutions that appeal to business decision makers. These solutions are not confined to particular departments in an enterprise, such as testing software for servers.
One of Mercury Interactive’s most difficult problems in making an acquisition is the lack of companies engaging in this field. If this is truly Mercury Interactive’s goal, it is hard to see how Quest can fit in, since it operates in the much narrower field of solutions for individual departments in enterprises.
Incidentally, software giants like CA-Computer Associates (NYSE: CA) and IBM (NYSE: IBM) are also looking for companies to acquire, in order to position themselves in this field. In this context, CA and IBM might, at least theoretically, aspire to acquire Mercury Interactive.
Published by Globes [online] - www.globes.co.il - on March 13, 2003