Mercury Interactive To Acquire Kintana In $225M Deal

Unlike the consolidation that is taking place in the enterprise applications software segment, which is being driven by cost savings, the Mercury deal is a bid to expand the BTO market, where both companies are seeing double-digit sales growth.

Mercury, which posted a 22 percent increase in sales in the first quarter, said it would pay $125 million in cash and $100 million in common stock for the privately held Kintana, which bills itself as a provider of an IT governance software suite. The purchase price is more than four times Kintana's sales of $44.5 million in 2002, a high premium in the midst of the current IT spending slump affecting some software and hardware makers.

Mercury shares were up 3 percent, or $1.41, to $42.05 in late afternoon trading.

Ironically, both companies, which started working together 18 months ago at the request of customers, are based here about two miles apart. The seven-year-old Kintana, which has 210 employees, will continue to be run out of its own facility with Raj Jain, the current president and CTO of Kintana, as general manager of the new business unit.

The deal puts Mercury--which is rapidly making a name for itself as a provider of software that allows CIOs to get a better return on investment from their current IT assets--into a position to reshape the BTO landscape by combining the Mercury Optane BTO products with the Kintana IT governance products, said David Murphy, vice president of corporate development at Mercury.

Murphy predicted that the combination, which still must receive antitrust approval from government regulators, will dramatically accelerate the adoption of the BTO software products by global 2000 companies and the broader market.

"We see this as a growth opportunity," said Murphy. "This expands the scope of BTO. It's a huge move." The governance software suite that Kintana brings to the table is increasingly important as CIOs grapple with government mandates such as the Sarbanes-Oxley Act, said Murphy.

If everything goes as planned, Mercury will more tightly integrate its software products with the Kintana products in the second half, said Murphy. He said Mercury, which uses a subscription pricing model for its products, will decide down the road whether to add such a subscription pricing model. The average initial price for a Kintana solution is about $300,000.

"This brings the governance or management capability of running IT as a business with operational tools that provide seamless ways for CIOs, companies and service providers to effectively decide how to run IT and operationally execute," he said. "By having these things tightly tied together, they can set priorities, application rollouts and manage feedback from operations on how well they are providing service from an IT perspective."

Mercury, which has pioneered the BTO category, often goes up against IBM Global Services and other services organizations assisting CIOs in getting more from their technology assets.

Murphy argued that solution providers and consultants would be better off "gravitating to where the growth is with BTO" and partner with Mercury rather than IBM or other vendor services organizations that "want to do more of the work themselves."

Once the deal is finalized, Mercury will move to significantly expand the Kintana channel, Murphy said, adding that Kintana currently has a direct-sales force of about 20 with a few systems integrators and consulting firms including Accenture, BearingPoint and Deloitte & Touche.

Among the Kintana applications that Mercury will roll out to its thousands of partners once the deal is complete is software to accelerate the deployment and management of specific enterprise products including those from Oracle, PeopleSoft, J.D. Edwards, SAP and Siebel Systems, said Murphy.

Murphy said the consolidation in the enterprise software applications segment, which he predicted will continue, will be a boon to the BTO software market. "Enterprise IT organizations will face challenges as a result of consolidation," he said. "There will be a set of demands placed on them as vendors [discontinue products] or change their product road map. BTO is a way to get a grip on that and a set of capabilities to manage that consolidation more efficiently."

For its part, Mercury, which paid $22.5 million for J2EE software maker Performant last month, will continue to grow through acquisitions and through its partner base and direct-sales efforts, said Murphy. "We are looking for other companies like Kintana and Performant that are market leaders and high-growth, profitable emerging companies in their own right so we can focus on accelerating the growth and value of BTO to our customers," he said.

James Hall, managing partner of technology and research for Accenture, the $13 billion consulting giant which works with both Mercury and Kintana, called the deal a leadership move that will provide CIOs with a complete BTO software solution suite. "This definitely creates a powerful combination," he said. "What it does is it put together Kintana's management framework and (IT management) dashboards with Mercury's (testing and performance management) tools and capabilities. This is a win win"

"The marketplace in this particular space is still forming so you have a number of different companies who have aspects of the solution," said Hall, noting the robust growth in the BTO segment. "We'd be very keen to see this particular transaction consummated because we think it puts together two of the key components." Hall pointed out that it's great to see a "merger not driven by defensive consolidation but by market growth opportunities."