Open Text Has a Bead on Targets in Acquisition Waiting Game

(Bloomberg) -- For the head of Open Text Corp., the question is not what to buy, but when.

Chief Executive Officer Mark Barrenechea says he knows exactly what assets the $14.4 billion information management company needs. There’s just one problem. His targets are “too expensive, too overvalued,” Barrenechea said in an interview. “Valuations are too lofty.”

The Waterloo, Ontario-based company expects to generate $6 billion in free cash flow over the next five years; its new policy is to allocate a third of free cash for dividends and share buybacks and the rest for growth, including mergers and acquisitions. Barrenechea said he is keen to acquire companies provided they meet internal hurdle rates.

However, for now he’s staying on the sidelines, waiting for “the right price” to come along. He attributes high valuations to low interest rates and an economic rebound in U.S., which sparked a frenzy in mergers and acquisitions in the first half of the year.

Global M&A hit record levels in the first half of 2021, with $2.5 trillion in deals. In Canada, the value of deals in 2021 has already exceeded 2020, excluding any terminated or withdrawn deals. Within the Canadian tech sector, total deal value for the first half of 2021 was nearly three times that of the first half of 2020.

Open Text’s latest earnings showed the impact of the broader recovery. Revenue rose 8.1% to $894 million in the quarter ended June 30, while adjusted profit more than doubled, according to data compiled by Bloomberg.

Flush with cash, Open Text increased its quarterly dividend by 10% and repurchased $119 million worth of shares. The stock closed at a record $52.62 on Aug. 6, the day after the earnings call.

The software firm is pivoting to focus on organic growth, which Barrenechea said is “back and here to stay.” The company’s target is organic revenue growth of as much as 4%. The information-management technology industry is worth $84 billion and should grow at an 8% compound annual rate between 2021 and 2024, Open Text said in its quarterly investor presentation.

Too-rapid growth sparks “unhealthy cultures and unsustainable businesses,” Barrenechea said at the analyst call, likening it to “bad cholesterol.”

“If you ask me for my spirit animal, it’s either an elephant or a sea turtle,” he said. “Slow and steady wins the race.”

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