Skip to main content

During its fiscal year ended June 30, Open Text generated revenue of US$3.39-billion.The Globe and Mail

Open Text Corp. has become one of Canada’s most valuable and profitable technology companies by buying and integrating other slow-growing enterprise software companies.

There’s one problem: The Waterloo, Ont., company hasn’t made a big deal since buying Boston-based cloud security firm Carbonite in November, 2019, for US$1.4-billion, and nothing at all since the pandemic began 17 months ago.

Open Text, which sells data-management software to large enterprises and governments, has unidentified targets in mind that it wants to buy, chief executive officer Mark Barrenechea said in an interview. The company has put a lot of effort into shifting its business to internet-based cloud software offerings. But, he said, with private capital funds and public markets investors driving up prices, “We have found the value expectations to be too high. … We’re not going to jump in and pay any price.”

The company has the capacity to spend US$6-billion-plus on a “transformative M&A opportunity,” he said.

So while Mr. Barrenechea awaits the opportunity to put Open Text’s cash to work buying other enterprises, his company is sending more of it back to shareholders. Last Thursday, when it reported fourth-quarter results, Open Text said it was raising its quarterly dividend for the eighth time since it began paying one in 2013, by 10 per cent, to 22.09 US cents a share. It also said it had bought and cancelled 2.5 million shares for US$119.1-million in its fiscal fourth quarter ended June 30 under a recently adopted buyback strategy.

Get ready for more: Open Text said it would expand its shareholder return strategy, in which it has sent 20 per cent of cash flows to shareholders via dividends. It has now raised the rate to 33 per cent, adding share buybacks to the mix, at least until the next big deal.

That’s not the only new strategy Mr. Barrenechea has adopted to impress investors. He’s also promising Open Text can actually grow on its own, even without acquisitions.

During its fiscal year ended June 30, Open Text generated revenue of US$3.39-billion, buoyed by 4-per-cent “organic growth” or top line increases from existing business.

The company has played down organic growth in the past, because the amount has typically been tiny or non-existent and less important as it added newly acquired businesses.

But last week, Mr. Barrenechea laid out organic growth targets for the first time. He pledged organic growth would reach 1 per cent to 2 per cent this fiscal year, rising to a 2- to 4-per-cent range two years later. “We have returned to organic growth, and organic growth is here to stay,” he said on a conference call to discuss earnings.

Analysts could hardly believe it. In a research note, Richard Tse of National Bank of Canada called the pledge “surprising” and “notable given the company’s history of being evasive on organic growth targets.” RBC Capital Markets analyst Paul Treiber wrote that “with visible organic growth, we believe Open Text’s shares may revalue upwards to reflect a growing, as opposed to declining, annuity.”

For many technology investors, promises of low single-digit organic growth may seem laughable. The biggest, most valuable names in the sector are high-growth stories, with investors more focused on the top than the bottom line.

For example, point-of-sale software seller Lightspeed Commerce Inc. more than doubled its loss to US$49.3-million in its most recent quarter – but its stock hit a new high after it delivered 78-per-cent organic growth in addition to gains from acquired companies. With its shares up threefold in the past year, Lightspeed is fast closing in on Open Text’s market capitalization of $18-billion.

But pushing for faster organic growth just isn’t Mr. Barrenechea’s thing. “Growth at any cost is bad cholesterol,” he told analysts. “We view that as a dangerous long-term proposition because it creates unhealthy cultures and unsustainable businesses.”

He’s sticking to what he calls his “intelligent growth” strategy, in which Open Text has doubled revenue and adjusted operating earnings over the past seven fiscal years. By comparison, commerce software giant Shopify Inc. has increased revenue over the same time frame nearly 60-fold as it became Canada’s most valuable company.

At times investors have seemed to grow a bit bored of Open Text’s strategy; last fall while internet stocks were soaring, Open Text’s stock was down, despite delivering results that topped expectations. One analyst called it a “valuation disconnect,” while another questioned whether the company’s goal of reaching for a 40 per cent operating profit margin (it was 38.8 per cent last year) was too high given higher multiples for sexier growth stories.

Mr. Barrenechea believes his new enticements will keep investors interested. And so far it’s working. On Friday, Open Text shares touched an historic high of $66.90 on the Toronto Stock Exchange.

If not, there’s always the potential for another big deal. “I think we’re a bit off the peak and heading more toward our zone” of what Open Text would pay, Mr. Barrenechea said. “We’re going to remain patient for those deals that add to our future organic growth.”

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.