Tech News: Autonomy Buys Verity

By Laura Board

The Deal, 4 November 2005

Cambridge, England-based software maker Autonomy Corp. plc Friday, Nov 4, took out a major competitor with a $500 million deal to buy Verity Inc, of Sunnyvale, Calif.

In transaction that will significantly expand its reach in the U.S., Autonomy is offering $13.50 per share in cash, a 30% premium to Verity’s $10.37 Nasdaq closing price Thursday

Shares in Autonomy, which is best known for its customer relationship management software, were up 14.5%, at 366.75, pence by early afternoon in London as investors decided the benefits of the deal more than offset the dilutive impact of a planned one-for-two share sale.

Simon Rawling, global head of project management consultancy PIPC, called the union a “sound marriage” in terms of technology.

“This is about packaging two very complementary businesses to forge a larger, stronger business process management proposition, both in Europe and the U.S.,” he said.

The acquisition is expected to be earnings enhancing before amortization in the first full quarter following completion, said Autonomy, whose software is used by 1,000 companies and organizations.

Verity has a 15,000-strong customer base. But the company, which specializes in business search and process management software, has suffered a near 20% decline in its share price in the past year as profit has been dented by restructuring charges and payment delays. For the fiscal year ended May 31, met income was $7.4 million, compared with $11.6 million the year before, and earnings continued to slide in its first quarter.

Verity’s sales were $142.6 million in fiscal 2005, compared with $124.3 million the previous year.

Autonomy, by contrast, said Thursday that nine-month net profit more than doubled, rising to $7.5 million, from $3.5 million, on sales of $64.5 million, up from $46.1 million.

“Verity should extend Autonomy’s reach by opening up U.S. market sectors for its muchlauded data handling technology, IDOL (intelligent data operating layer), said PIPC’s Rawling

The transaction requires approval from both sets of shareholders and is expected to close in late 2005 or early 2006, subject to customary regulatory closing conditions.

Autonomy plans to make Verity its U.S. base and will put Verity CEO Anthony J. Bettencourt at the helm of that unit, Autonomy Inc. Autonomy CEO and co-founder Mike Lynch will remain as head of the group.

The transaction is Autonomy’s third in the U.S. so far this year. In April it agreed to pay $70 million for private equity-backed etalk Corp. of Irving, Texas, bolstering a recent move into the call centre market. In January it bought San Francisco-based NCorp, which specializes in structured data handling, from private shareholders.
Morgan Stanley’s Mike Wyatt and Paul Kwan are advising Verity, with Cooley Godward LLP and Lovells anong the firms providing legal counsel.

Deutsche Bank AG’s Carleigh Jaques and Thierry Monjauze and UBS Investment Bank’s Affan butt, Sean Bennett and James Renwick are assisting Autonomy. Wilmer Cutler Pickering Hale and Dorr LLP’s Richard Eaton, Sarah Hanlon and Giles Hawkins are Autonomy’s law firm.

UBS Investment Bank is underwriting a share sale for Autonomy to raise about £153 million ($270.9 million) to help fund the purchase.

Under the deal, Verity has agreed to pay a breakup fee to Autonomy of $12 million, while Autonomy may be required to pay $6.7 million in circumstances relating to a breach of financing obligations.