Rocket Software Buys NetManage for $69 Million

January 7, 2008 Timothy Prickett Morgan

Rocket Software, a privately held maker of mainframe and System i tools based in Newton, Massachusetts, has made the shareholders of NetManage an offer they probably will not refuse. After IT Jungle went on holiday in December, Rocket Software said that it was willing to pay $7.20 a share, or $69 million, to acquire publicly held NetManage, which makes host connectivity and legacy application modernization software for mainframe and System i gear and which is based in Cupertino, California.

The acquisition puts to rest any chatter in the past two years about how NetManage would compete against larger and privately held rivals, who do not have Wall Street breathing down their necks every quarter. In the host connectivity area, NetManage was comparable in size and customer base to its main rivals, thanks in large part to its Rumba host connectivity software base and its OnWeb application integration and modernization software.

Two private equity firms–Francisco Partners and Thoma Cressey Bravo–started the consolidation in this host connectivity and application modernization space in December 2004 when they bought WRQ. WRQ was privately held at the time, so the amount that the two firms paid for the company is not known. Then, in April 2005, Golden Gate Capital joined these two firms to buy rival Attachmate, creating AttachmateWRQ. A year later, in April 2006, the venture capitalists ponied up $495 million to buy security software specialist NetIQ, which was publicly traded and which itself was the result of many mergers (including WebTrends, PentaSafe, Mission Critical Software, Ganymede Software, Sirana Software, Marshal Software). The three-way merged company owned by the equity firms was eventually named Attachmate, and had about 40,000 customers, 16 million users, and $400 million in annual revenues in 2006. About half of that revenue comes from the Attachmate and WRQ product lines.

With so much equity capital sloshing around since 2004 and as a publicly traded company that has its financial ups and downs, it was only a matter of time before someone made a bid on NetManage. In September 2006, two companies with a combined 15 percent stake in NetManage–Riley Investment Management and Zeff Capital Partners–offered to pay $5.25 a share or about $42 million to buy the remaining 85 percent of NetManage’s shares that they didn’t control. In November, after NetManage’s management said no dice to the deal, they raised the price to $5.50 a share, adding another $2 million to the price. At the time, NetManage had a market capitalization of $47 million and over $28.1 million in cash, so this seemed like an exceedingly stingy offer. Then again, NetManage saw a pretty big revenue decline in 2006, dropping 18.1 percent to $35.6 million in sales and swinging from a $2.43 million profit in 2005 to a $3.64 million loss in 2006.

Through the first nine months of 2007, NetManage had sales of $25.1 million and booked a loss of $2.95 million. (Most of that was due to restructuring charges that hit in the first quarter of 2007.) Given the financial ups and downs for NetManage in the past eight quarters and the $25.7 million the company still has in cash and short-term investments, the $69 million offer from Rocket Software–a 95 percent premium over the NetManage share closing price on the day before the deal was announced–seems fair. As we go to press on Friday, NetManage is trading at $5.65 per share, giving the company a market capitalization of $55.5 million. The share decline is a bit perplexing, since NetManage’s stock rocketed up to $6.99 a share when the deal was announced on December 12. Part of it could be that Riley Investment Management chopped its stake in NetManage from 7.4 percent to 5.9 percent, cashing in on the wave and cashing out (in part) on a company that would not let Riley and its partner shareholder acquire it.

The acquisition of NetManage by Rocket Software will allow this software company to build out its product catalog and its customer base with some 10,000 customers in the System i, System z, and other server markets. In December 2006, Rocket Software expanded from its mainframe and tools space into the System i space when it acquired Seagull Software, which among other things sells a line of products for application modernization on System i and System platforms called LegaSuite, for $55.7 million. (Seagull Software is a long-time player in the OS/400 and i5/OS market that is based in the Netherlands.) In October 2007, Rocket Software also acquired a database conversion tool for Oracle E-Business Suite created by a company called SmartDB, which sold off that unit to focus on selling its collaborative software for spreadsheets, called eXpresso. Rocket Software was founded in 1990–the same year that Seagull Software was founded in Amsterdam, the Netherlands–and got its big break in 1994 when it was picked as a development partner by IBM, which licensed software from the company to make the Query Management Facility on mainframes better. Hewlett-Packard uses Rocket Software to extend OpenView; EMC uses the software from the company to provide backup and restore on mainframes of DB2 databases and additional mainframe security products (through EMC’s RSA Security products. And CA licenses code from Rocket Software for its eTrust security products. The company has many other such partnerships.

“NetManage, with its leading number of customers and impressive product portfolio, was particularly attractive to us from an acquisition standpoint,” explained Andrew Youniss, chief executive officer at Rocket Software, said in a statement announcing the deal. “We continue to acquire market-leading products as part of our growth strategy and NetManage fits perfectly into our comprehensive set of solutions.”

Rocket Software expects the deal to close in February 2008, pending approval of regulatory bodies and NetManage shareholders. When the deal is done, we will talk to Rocket Software about how the NetManage and Seagull product roadmaps will be managed and what its plans are for taking on the System i and System z markets.

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