Autonomy keeps powder dry on acquisitions

After a tricky end to last year, there was some relief last week when Autonomy followed IBM and Intel in saying that its customers were spending more, and on a wider range of IT products.

Adjusted pre-tax profits of $95m for the first quarter, on sales up 13 per cent to $220m achieved by the UK software group were ahead of expectations, albeit modestly.

And comments from Mike Lynch, chief executive, that Autonomy was seeing a “gentle sustained recovery” and that current market estimates for the year could “turn out to be conservative”, helped lift the company’s shares more than 7 per cent on Thursday.

But absent from last week’s statement was any significant update on Autonomy’s long-anticipated North American acquisition.

The Cambridge-based software company raised £500m via a convertible bond in February 2010 that, based on current exchange rates, gives Autonomy a war chest of $1.1bn to spend on an acquisition.

Autonomy rather confidently, and analysts say in hindsight foolishly, hemmed itself in to a time frame by saying a deal was likely to be signed by the autumn of 2010. However, in November it issued a short statement saying that while it had been working on an acquisition, developments within these talks had “given rise to an additional opportunity” that warranted further examination.

Meanwhile, analysts speculated that this could mean that Autonomy had been looking to buy part of a business but had since widened the scope of the deal, or that it had pinpointed an additional takeover target.

Others suggested that Autonomy’s had been beaten by a competitor in its quest to find a company to complement its portfolio of software.

There was even a suggestion that Autonomy had gone after ART Technologies, which Oracle agreed to buy for about $1bn last year. But at the fourth-quarter earnings in February, Mr Lynch said that the target had not been acquired.

Open Text was seen as a possible target, something that the Canadian company has dismissed.

In fact Autonomy’s previous record – which saw it buy Interwoven in 2009, Zantaz in 2007 and Verity in 2005 – shows it rarely buys the number one in sector. And with so many software players of about $1bn falling within the scope of Autonomy’s net, market observers have stopped guessing.

Autonomy’s purchases over the past few years have led some to ponder what constitutes real underlying growth at the group. Decent third-quarter results that were accompanied by a warning on the fourth have also rattled some investors and weighed on the share price.

Some analysts speculate that without an acquisition Autonomy’s run of consecutive quarters of double-digit growth looks unsustainable.

“Given that M&A is a very important part of bottom-line growth, the dynamic if Autonomy can’t close a deal is not good,” says Gunnar Plagge, an analyst at Nomura. But he says that investors would prefer Autonomy to find the right deal than press ahead with a transaction that had any potential pitfalls.

And Thursday’s results provided the bulls with something to cheer about. Michael Briest, analyst at UBS, says that while first-quarter revenues were not miles ahead of forecast, licence growth was up 17 per cent, much better than the mid single-digit growth forecasts.

He adds: “The main takeaway for those people who were worried about growth, is that the business is accelerating not decelerating.”