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Business Objects Buys Crystal Decisions for $820m.

In a surprise move late last Friday, French-American business intelligence vendor (BI) Business Objects SA announced its intention to buy privately-held Crystal Decisions Inc, a Canadian enterprise reporting vendor, in a stock transaction valued at around $820m.

In a hastily convened teleconference with financial analysts late Friday afternoon, both Business Objects CEO Bernard Liautaud, and John Judge, CEO of Crystal Decisions, called the acquisition "a defining moment for the BI industry".

"This represents the combination of two strong companies with complementary strengths across multiple dimensions...products, channels, skill sets, and international presence," said Liautaud.

Liautaud told analysts that he believes the acquisition leverages the current market dynamics - pointing specifically to BI's growth potential, current under-penetration, and relative immaturity. "Only ten to fifteen percent of the market has been reached...it's still a fragmented market, with no clear leader....it's not unusual for ten or more BI technologies to be used within a single organization".

Liautaud isn't far off the mark here. After a gold rush of technology purchasing in the 1990s, companies are indeed looking for ways to rationalize their investments and standardize on a single, complete BI set. "We'll now be able to deliver on its goal of providing a best-of-breed set of products that cover all segments of BI...from one single vendor," Liautaud said.

Indeed Business Objects may have a strong case here. The company has been busy loading up its portfolio of products; in July last year it bought Acta Technology Inc for $65m to add extract, transform, and load (ETL) capabilities to its existing portfolio of OLAP query and analysis tools and packaged applications. Business Objects will now be able to offer a full gamut of functionality - from data integration, ad hoc query/analysis, analytic applications, and now enterprise reporting - that fulfills the needs of all BI users across the enterprise. But past experience has also shown that the 'end-to-end' approach does not necessarily work unless all the components are in fact 'best-of-breed'.

Few could have predicted Business Objects' move for Crystal considering the bitter rivalry that often surfaced between the two companies, as well as Crystal's recent announcement in May that it had filed for a $172.5m IPO. A public offering has always been on the cards for the Vancouver-based company which is one of the fastest growing companies in BI - over 33% last year - bettered only by ProClarity Corp.

As a privately held concern, Crystal is a relatively unknown quantity on Wall Street and the investment community at large. But based on its publicly declared figures, Crystal's financial fundamentals seem to be sound. The company has achieved eleven consecutive quarters of steady growth, and has a net margin of 14%, which is much higher than Business Objects' margin of 9%. Crystal's revenues last year totaled $271m versus Business Objects $466m.

"This is an appealing merger for us in terms of stronger financials and net margins," Liautaud said. "Since BI is becoming more strategic, companies can't afford to take risks with vendors whose financial viability is in question," Liautaud said. "This isn't simply the acquisition of a broken entity by another player trying to gain entry into another market".

Judge backed up this view saying "Our acquisition by Business Objects accomplishes every strategic financial imperative we have, faster and more completely than we could ourselves".

"We've believed for some time that the software industry would experience increased consolidation and that consolidated companies would be advantaged by size, growth potential, and international presence," Judge added. "Our strategy has been focused on industry leadership by becoming a billion dollar company. We've also wanted to be a public company to give our shareholders more liquidity options".

The transaction is expected to be based on a mixture of cash ($320m) and equity considerations (26.4m shares). Based on the current ownership structure 71% will go to Business Objects shareholders and 29% to Crystal shareholders. The transaction is expected to be accretive to Business Objects' 2004 earnings; both companies believe there are significant cost saving opportunities and have already identified several areas for eliminating redundancy and duplication of efforts. Business Objects expects pre-tax savings of approximately $25m for fiscal 2004.

Once completed, the merger will create one of the biggest business intelligence (BI) companies with over $736m in combined revenue, 3,800 employees, over 16m licenses, and over 20 patents (or patents pending). It will also propel Business Objects above arch-rival Cognos Inc which reported $551m in revenue last year and which has consistently topped several industry analyst BI charts as the largest vendor by market share. Specifically, the deal will strengthen Business Objects' foothold in the enterprise reporting market; a segment of the BI market that Crystal dominates with its Crystal Reports authoring tool and Crystal Enterprise platform products which have amassed over 14m licenses worldwide. Enterprise reporting is also in the sights of Cognos, which unveiled its own enterprise reporting platform codenamed 'CR1' at its user conference earlier this year.

Liautaud was quick to reassure customers that both product lines would continue to be supported. Indeed he would be foolish to let the Crystal brand slip.

"We're bringing on board one of the best know brands in the BI space," Liautaud said. "Crystal technology is embedded in hundreds of applications through 350 partnerships with premier software companies such as SAP, PeopleSoft and Hyperion Solutions...It's also the reporting tool of choice for Microsoft developers; it's been embedded in Visual Studio for several years now". However Liautaud did acknowledge that the risk of functionality overlaps and duplication occurring over the long term and said that both sets of R&D departments would work closely to avoid this.

Liautaud also pointed to new for cross- and up-selling opportunities, specifically by leveraging each others' sales channels. Business Objects has historically been focused on enterprise sales and SIs. Meanwhile Crystal has developed a strong 'inside' sales model via OEMs and resellers, and is only now starting to step up to enterprise sales.

"We'll position a combined sales force to sell our ETL and applications into Crystal's base, and also bring Crystal's enterprise reporting technology into our own 17,5000 strong base," Liautaud said. Additionally, Business Objects is also hoping to tap into Crystal's foothold in Asia-Pacific; while Crystal will benefit from Business Objects' strong presence in Europe where enterprise reporting remains under-penetrated.

While the merger looks good on paper, integration at product, sales and cultural levels still needs to be executed. The signs are encouraging; Business Objects did a sterling job of assimilating Acta's technology, sales team and developers into its fold. However, Business Objects may find it challenging to unravel Crystal's vast channel program, particularly its 350 or so OEM relationships, which could throw up some conflicts as both sales team start to target each others' account base. Liautaud however remains confident about the company's ability to execute on integration. "Our businesses are complementary, the two companies are in great health and both sets of management teams have a clear vision of what the combined entity will be".

Meanwhile, Business Objects announced preliminary results for the second quarter ended June 30, 2003. Revenue will be in the range of $127m to $129m, with earnings per share between $0.17 and $0.18.
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Publication:Computergram International
Geographic Code:4EUFR
Date:Jul 21, 2003
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