But some questions remain. First the answers from today’s analyst call. Keep in mind that DS couldn’t answer some of the most pointed questions because IBM PLM is a non-reporting piece of a public company and, as such, DS can’t disclose the unit’s financials.
• This is an all cash acquisition of about $600 million. On June 30 DS had 850 million euro in cash on its balance sheet, or about $1.2 billion, so DS will still have a strong cash position after the deal closes.
• IBM PLM’s named accounts revenues were about $400 million for the nine months ended September 2009; DS characterized full-year revenue at around $600 million. The unit has a high level of recurring software revenue (perhaps as high as 2/3) and “solid operating profitability”. DS therefore expects the acquisition to be accretive to earnings and operating margin.
• Aside from customer benefits articulated by DS, a practical result of the acquisition will be to strengthens direct sales in certain countries in Europe, where DS doesn’t currently have much sales or support capacity.
• IBM PLM includes roughly 700 people in sales, pre-sales, customer support, etc. but, as part of a larger corporation, no back-office staff. So part of DS’ acquisition process will be to build out this infrastructure.
• The two companies have signed a master agreement; now separate deals must be made in each country to satisfy regulatory and labor relations requirements around the world.
• Chronology: IBM in 2007 took the initiative to work with DS on their 4th generation indirect channel and, apparently, contacted DS two months ago about how to adjust their partnership to take advantage of cloud computing (for a 5th generation). Whether the cloud is private or public, implementations will need lots of consulting. [That’s what DS CEO Bernard Charlès said. So it appears IBM contacted DS; DS didn’t seek this out.] Analyst extraordinaire Jay Vleeschhouwer has an interesting take on this: in 1982, IBM sold CADAM to DS but then built a large distribution channel around DS products. That business has been shrinking; now it sells off its DS-related PLM business. Why do they keep divesting here?
• One apparently key element in the deal was the ability to provide financing to customers, should they need it. IBM Global Financing (IGF) has been working with IBM PLM and its customers; some variant of that infrastructure will stay in place so that DS can call on IGF.
Analysts on the call had trouble with the valuation: why $600 million? In one view, it’s roughly 1x annual sales. But since IBM pays DS a royalty of about 50% on software sales, DS is essentially buying the other half of software sales as well as the services on which it doesn’t currently get compensated. Too, profitability is hard to gauge, since DS will have to add infrastructure to the existing business. CFO de Tersant encouraged analysts to think about this as a “distribution business with yearly revenue of around $600 million, more than 2/3 being recurring.” DS says all will be made clear when it issues 2010 guidance in February, after the deal has progressed and it feels more comfortable with the cost side of the equation. DS did reiterate that it believes the acquisition is accretive even after it adds supporting staff.
DS did not address alternative uses of its cash other than to say that this acquisition is attractive, in part, because no software roadmap has to be integrated. A number of software companies are on the block (and have been for a while), so DS clearly chose this option as the best way to grow its business and reward shareholders.
Stay tuned — more information may come out when DS announced Q3 results on Thursday.