In the first definitive move of president and CEO Tod Nielsen’s new reign, Borland Software Corp announced it is buying testing tool provider Segue Software Inc for $100m cash.
And, in a long-debated move, Borland has also finally decided to spin off its development tools business.
Segue fills a gap in Borland’s ALM portfolio. The company, whose initial claim to fame was delivering one of the first functional test suites designed for web applications, complements Borland’s existing business in developer-oriented unit test tools.
Potentially, it also fills a gap in Borland’s lifecycle offerings by providing high-level quality management that could tie into its existing requirements management, change management, modeling, and governance offerings.
In explaining the acquisition and spin-off strategy, Nielsen conceded almost verbatim what dissident investors, such as former Borland director Robert Coates, lobbied heavily for last year.
Borland is spread too thin across the product portfolio, which has negatively affected our ability to execute, Nielsen admitted.
Nielsen’s rationale also echoes what many critics have claimed: that the markets for developer tools do not mesh with those of ALM.
While IDEs are typically sold as shrink-wrapped software to developers for prices of a few hundred dollars or given away free as open source, ALM involves a longer enterprise sales cycle to VP level and up, with deals ranging in five or six figures and up.
Consequently, Borland has engaged Bear Stearns to help find a buyer for its tools business, including JBuilder, C++ Builder, Delphi, Kylix and other products. Nielsen said that he hopes that a deal could be made in the next couple quarters.
When it finally completes the spin-off, Borland will have made an almost full break from its roots. Although it has been in a variety of businesses over the years, Borland was always best known and loved for its development tools, which continue to draw loyal followings. The dilemma is that IDEs have become such a commodity business that only a small, lean outfit could ever hope to make money from them.
The deal won’t totally eliminate development tools from Borland’s portfolio. Its Together offerings, which provide roundtrip capabilities for generating Java from UML models, will continue to be part of its catalog.
Nonetheless, while Borland is refocusing on ALM, it currently has no plans to divorce the middleware portfolio. Comprising the J2EE appserver and the legacy CORBA-based Visibroker business, there are few if any synergies with ALM. And like development tools, open source is commoditizing middleware as well.
According to Mike Hulme, senior director of product marketing, the rationale for retaining middleware is that like ALM, they are both enterprise sells.
As part of its strategy, Nielsen said Borland would now focus on the pre-deployment life cycle. That’s actually a bit deceptive, as governance tools and performance testing tools can also be used after software has been deployed.
Hulme clarified that a bit, saying that Borland was leaving the run time monitoring of applications to incumbents such as BMC, CA or HP (and in fact, Borland played up the fact that Segue already has strong ties with BMC). Such data of course would provide a feedback loop to its governance dashboards.
With its latest acquisitions of Segue, and governance tools vendor Legadero Software Inc before that, Borland is increasingly finding itself going head to head against its former arms length partner Mercury. Nonetheless, Borland plans to deliver a promised link from its requirements and UML products to Mercury’s QA offerings in Q2.
Borland said it had some joint customers with Segue, but didn’t get more specific. However, even if they were in the same accounts, chances are, Segue wasn’t selling to the top management levels targeted by Borland’s ALM offerings.
The announcement of Borland’s moves coincided with announcement of Q4 results that, according to CFO Kenneth R. Hahn, ends a painful 2005. For the quarter, Borland reported $71m revenues, representing a GAAP net loss of $9.6m or $0.13 per share.
Looking ahead, Borland’s guidance is for $65m to $67m revenue in Q1 2006, which Hahn said is the start of a transitional year. Borland’s goal is to deliver 10% to 15% margins by FY 2007.
By contrast, Segue has been on a modest roll, netting $10.1m in Q4, representing a 19% increase over the same period a year ago. For the full year, Segue reported $36.4 m revenues, a gain of 10% from 2004. Net income for the year was $2.89m, or $0.25 per share, compared to $1.7m and $0.15 per share a year ago.
Borland’s $100m, or roughly $8.67 per share, offer for Segue represents roughly a 20% premium on the stock’s closing price prior to the announcement.
Borland expects the Segue deal to close sometime in Q2, and after that it will start breaking out ALM revenues separately.