Tech Deal Maker
September 28, 2004

Long-time enterprise software player Progress Software (Nasdaq: PRGS), which has been in business since 1981 and publicly traded since 1991, is a company that will jump in and make an acquisition when it perceives an opportunity to get complementary software capability out the door quickly. That is what it did in November 2002 when it spent $24m on eXcelon and in December 2003 when it acquired DataDirect Technologies for $88m. With just over $185m in cash and equivalents to play with at the end of August, Progress certainly didn't hesitate to buy Persistence Software (Nasdaq: PRSW).

Persistence itself was founded in 1991, just about when Progress went public, and itself went public in 1999, with underwriters led by what was then called BancBoston Robertson Stephens. In recent years its market cap has been mostly down in the $10-15m range. In addition to about $5m in cash and 40 employees, Progress will gain access to about 100 Persistence customers. Persistence has focused on Unix and Java enterprise applications for distributed data access and caching, but very recently delivered .NET support within its core EdgeXtend product suite. As is typical of how Progress runs its different lines of business, Persistence Software will be integrated within Progress' ObjectStore operating company.

Financial details

The acquisition itself is quite straightforward. Progress will dole out $5.70 per share in cash f! or Persistence, which amounts to just about $16m. Persistence's stock has traded between $3.00-6.45 over the past 52 weeks, so there isn't much of a premium being paid here if viewed across that trading range. However, the price does reflect an immediate 52% premium over the $3.74 price the stock was trading at when the deal was announced. Overall we view the valuation as quite fair and a very good deal for Progress.

The transaction is expected to close within 90 days, and although the boards of both Progress and Persistence have agreed to the deal, Persistence's shareholders still need to pass the obligatory approval. Progress expects the deal to be accretive fairly quickly — a pro forma breakeven scenario if not a profit of $0.01 per share over the course of a year — and also anticipates somewhere in the neighborhood of $8-9m in incremental revenue .

Progress last reported earnings only several weeks ago, delivering a relatively positive fin! ancial picture. For its fiscal third quarter, which ended August 31, the company reported revenue of $89.3m, up just about 15% from the same period last year. More importantly, software licensing revenue increased 21%, jumping from $27.2m last year to $32.9m. On a GAAP basis, operating income increased as well, to $12.7m, up from $10.1m last year. The company also reported that profits were up 16%, from $7.3m ($0.19 per share) in the third quarter of 2003 to $8.5m ($0.22 per share) this year. Cash and equivalents on hand added up to $185.4m, a total that the cash acquisition of Persistence will hardly put a dent in.

Progress says there has been substantial increase in demand for real-time data, which plays directly into the strengths of the company. Its core lines of business — Sonic Software, DataDirect and ObjectStore (under which Persistence will be integrated) — all delivered solid performance. The company also says it had pulled in a substantial a! mount of new business through new customers and partners, including A3 Solutions, ADT Security Services, All Nippon Airways, the British Airport Authority, BBS Technology, Petroleum Wholesale, Sharper Image (Nasdaq: SHRP) and the State of Minnesota.

Progress also has provided fourth-quarter guidance. It expects to see revenue between $93-95m and GAAP earnings per share in the range of $0.26-0.27. Overall for fiscal 2004, Progress believes revenue will come in between $360-362m, with GAAP profits for the year between $0.80-0.81 per share. Still, even with a 21% increase in licensing revenue and what amounts to a solid fi! nancial performance, the company — which has a current market cap of $724.7m — doesn't seem to be sparking much interest from the financial community, with its share price remaining essentially unchanged in recent weeks, at about $20 per share.

Deal rationale

Persistence has had a great deal of competition for its core EdgeXtend technology, including from Microsoft (Nasdaq: MSFT) itself within the .NET environment. Although it hasn't set the world on fire financially of late, the company reported a net profit of $135,000 for its most recently reported quarter, which ended June 30. This is a significant improvement over the quarter that ended on September 30, 2003, when it reported a loss of $1.21m. Progress jumped in at the right time, acquiring technology it will have no trouble integrating within its own pr! oduct suite, at a good price and at a time when Persistence has turned a financial corner.

Progress will expand its ObjectStore line of business through the acquisition. ObjectStore is all about delivering real-time, literally up-to-the-second views of business information, allowing companies to make critical business decisions with all the current data in hand. The company says it has seen a major ramp-up in demand for such capability, and says Persistence offered exactly the right software to complement its own products — ObjectStore Event Engine and object data management. ObjectStore will now add Persistence's distributed data caching capabilities to this suite, and will rename the product as ObjectStore EdgeXtend. ObjectStore itself will add additional capabilities to EdgeXtend from its own existing ObjectCache technology.

Conclusions

We are always big fans of deals where there is very little technology overlap, easy technol! ogy integration and an accrual of new customers. Typically a company either gets some technology and no new customers or some new customers at the expense of jettisoning technology (think Oracle (Nasdaq: ORCL) and PeopleSoft (Nasdaq: PSFT) for an upcoming example). Progress has managed to do both in the wake of a rather positive quarter, with very little impact on its overall financials.

Will the Progress deal perhaps spur others to look at M&A in this space? The current acquisition echoes a similar one from last year, when Versant (Nasdaq: VSNT) acquired Poet Softwar! e for about $26m, but we doubt we'll see much activity here going forward. Versant was a direct competitor to eXcelon (the company Progress acquired in 2002). Persistence has a number of fairly inconsequential competitors from a company size perspective — Objectivity, InterSystems and GemStone Systems come to mind.

Perhaps Computer Associates (NYSE: CA), which has a competing product in its Jasmine suite, may be interested in an acquisition here. CA has recently been liberated of the federal investigation it has toiled under for some time, and company management has strongly hinted that it will resume its acquiring ways in short order. Strictly in terms of the synergies we see between Progress and Persistence, however, ! we don't see a similar match presenting itself anytime soon.