OpenText snaps up cloud security firm Carbonite in $1.42 billion deal
A US$1.42 billion cybersecurity acquisition by OpenText Inc. Monday marks a down-market strategic shift for the Waterloo, Ont.-based enterprise information management company.
Carbonite Inc. is a Boston company with US$405 million in revenue, selling endpoint security software and cloud data protection services.
But notably, about 90 per cent of Carbonite’s customer base is individual professionals — “prosumers” — and small and medium-sized businesses (SMB).
By contrast, OpenText has historically focused on selling to the so-called “Global 10,000” — the largest enterprise customers in the world.
Buying Carbonite Inc. gives OpenText seven million individual professionals, and 300,000 SMBs to up-sell.
“We’re declaring SMB and prosumer a strategic market for enterprise information management,” OpenText CEO Mark Barrenechea said in an interview.
Barrenechea said he expects it’ll take about 18 months to integrate Carbonite into OpenText, but he emphasized that there’s no rush.
“Let me just note a few things about Carbonite: It’s profitable. It’s operating at a higher margin,” Barrenechea said.
The company has a long history of growing through acquisition; OpenText spent nearly US$3 billion between 2013 and the beginning of 2017, including the US$1.62 billion acquisition of Dell EMC, the company’s enterprise content management division.
Analysts were largely positive about the Carbonite acquisition and OpenText stock was up about 2.4 per cent to close at $56.27 Monday in Toronto.
In a note to investors, National Bank analyst Richard Tse noted that the opportunity to pursue smaller customers could be interesting to watch.
“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 also said it is a way for OpenText to bolster its cybersecurity chops.
“From a strategic standpoint, we believe the transaction is compelling as Carbonite complements OpenText’s current security software portfolio,” Tse wrote. “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.”
When technology companies value cybersecurity and implement that into their product lines, they get noticed and, in a way, gain credibility because it’s one less thing IT needs to worry about
Michelle Tran, security and risk-management specialist, Info-Tech Research Group
Michelle Tran, a security and risk-management specialist at Toronto-based research firm Info-Tech Research Group, said that cybersecurity acquisitions like this are becoming commonplace in the tech sector, as large service providers try to emphasize that they’re serious about security.
“With the increase in cybercrime, growth in data, tighter regulations around data protection and digital transformation such as cloud and Internet of Things adoption, cybersecurity is at the forefront of everyone’s agenda. Not only do organizations want to incorporate their purchased technology from vendors to enable business process, but they also want the process to be handled securely and with integrity,” Tran said.
“When technology companies value cybersecurity and implement that into their product lines, they get noticed and, in a way, gain credibility because it’s one less thing IT needs to worry about.”
OpenText is forecasting “low single-digit organic growth” once Carbonite is integraged, but by adding customers through acquisition the company is still pursing a “total growth” strategy that includes growing through acquisition.
As a result of the purchase, the company is taking on more debt, but expects its net leverage ratio to return to normal within 18 months.
In his investor note, Li suggested that the company is in a strong position.
“For those who may question the ability to de-lever, we’d point out that OpenText has one of the most disciplined de-levering track records among the acquisition growth names in our coverage,” Li wrote. “For some perspective, investors will recall OpenText acquired Documentum for US$1.62 billion in September 2016, taking its leverage ratio to ~3.5x at that time; today, it stands at 1.5x with about $800 million in free cash flow generation as of fiscal 2019 (June).”