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Open Text has expanded mostly through acquisitions in recent years, but has struggled to grow its existing operations. (Kevin Van Paassen/The Globe and Mail)
Open Text has expanded mostly through acquisitions in recent years, but has struggled to grow its existing operations. (Kevin Van Paassen/The Globe and Mail)

Tech

After Open Text's surge, should you buy it? Add to ...

Open Text Corp. investors are counting on the cloud to help boost profits at the Canadian software company following its latest acquisition.

Open Text shares soared 10 per cent on Tuesday to a record high after the company, based in Waterloo, Ont., said it was spending $1.17-billion to buy privately held GXS Group Inc., a cloud computing e-commerce firm.

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Analysts say Open Text paid a fair price for the Maryland-based company, at 2.4 times its 2012 revenue of $487-million, and believe the deal will give the company a larger and more consistent revenue stream.

“The stability of our recurring revenues … is part of what we find very attractive,” Open Text chief executive Mark Barrenechea told investors on a conference call Tuesday.

Still, there is concern about how much revenue growth GXS can bring to Open Text, while some analysts are scratching their heads at how the core businesses of the two companies will fit together.

Open Text is focused on software that helps companies manage documents and the flow of work. GXS handles electronic ordering, billing and payments through cloud computing services, which allow users to store and process data on the Internet from wherever they are.

“I am not 100 per cent sold on the strategic fit,” said BMO Nesbitt Burns analyst Thanos Moschopoulos.

Open Text has expanded mostly through acquisitions in recent years, but has struggled to grow its existing operations, analysts point out.

“Will this really help improve their organic growth prospects? It’s not clear that it will,” said Mr. Moschopoulos.

Of the 16 analysts that cover Open Text, Mr. Moschopoulos is one of six with a “hold” rating on the stock, while nine recommend it as a “buy” and one suggests “sell,” according to Thomson Reuters I/B/E/S.

Investors appear to be following the “buy” crowd.

Open Text shares hit a record $87.99 on the Toronto Stock Exchange on Tuesday, up 71 per cent from the 52-week low of $51.38 at this time last year. Open Text shares started to take off in late April after the company introduced its first-ever dividend payment, which yields about 1.6 per cent.

The company, trading at 13 times earnings, is considered cheap by some investors, especially in comparison to a few of its software peers. TIBCO Software Inc. changes hands at 20-times profits, Constellation Software Inc. at 17 times and Progress Software Corp. at 16 times, according to S&P Capital IQ.

The stock has benefited from growing investor interest in the tech sector over the past several months.

Before Tuesday, Open Text shares were up 37 per cent so far this year, which compares to a 7.5-per-cent increase in the S&P/TSX Composite.

Open Text also trades on the tech-heavy Nasdaq, which is up 30 per cent so far this year, according to S&P Capital IQ.

“Open Text is the last great remaining pure play content manager vendor,” said Mark Schappel, an analyst at The Benchmark Company in New York, who has a “buy” on the stock.

While Mr. Schappel is skeptical of how the GXS business fits into Open Text’s core business, he likes the deal and believes it will bolster the Canadian company’s much smaller EasyLink cloud-based messaging service bought in May, 2012.

“We think management was willing to do the deal because the price was right,” Mr. Schappel said in a note on Tuesday, calling it a “reasonable valuation for a leading vendor in its segment.”

Brian Acker, president and CEO of Acker Finley Inc., believes Open Text shares have more room to rise after Tuesday’s surge.

His firm bought Open Text shares through its Canadian Equity Fund in April at an average cost of $61 and believes a fair value for the share is around $98.

“We and the market like the acquisition announcement today,” said Mr. Acker.

Follow on Twitter: @BrendaBouw

 

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