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Print Edition StoriesFriday, October 16, 2009
Rocket Software takes first equity dip, of $92M, in 19 years
By Galen Moore
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One of the region’s quiet success stories, a closely held software developer with over $150 million in revenue, has gone to the private equity well for the first time — and drawn deeply.
Newton-based Rocket Software Inc.’s $92 million first private equity financing will be used as a war chest to continue the company’s acquisitive bent, a spokesman said.
Since 2005, Rocket has made at minimum two acquisitions each year — bringing its total since its 1990 founding to at least 24 M&A deals without outside investment. Most recently, Rocket acquired the U2 database line of business from IBM Corp. (NYSE: IBM) for undisclosed terms in a deal announced this month.
“Rocket intends to use the proceeds (of its outside equity investment) to continue acquiring enterprise infrastructure software companies, intellectual property and other assets,” said company spokesman Richard Berman.
The funds from New York-based Court Square, disclosed last week in a regulatory filing, come to a company that bootstrapped itself through the 1990s developing software and tools as an original equipment manufacturer (OEM) for IBM. Since then, the company’s business has grown and evolved to include OEM and direct sales in almost every enterprise software category.
The funding may be intended to ensure Rocket does not repeat its foible of March 2008, when plans for a leveraged $69 million acquisition collapsed as credit markets grew unstable. The intended target, Cupertino, Calif.-based application modernization software maker NetManage Inc., was soon snapped up by Micro Focus International for $73.3 million.
Rocket has over $150 million in revenue, and 700-plus employees, Berman said. With its recent acquisition, the company added IBM’s entire U2 division to its payroll. IBM and Rocket did not disclose the U2 head count, but an IBM U2 business partner pegged it at about 95 employees.
Berman said the new financing will not, however, be used to restructure debt, or to pay down operating costs, such as a $50 million legal settlement it signed in February with CA Inc. (Nasdaq: CA).
In 2007, CA sued for $200 million in damages, alleging Rocket had copied the company’s patented software code in two database products. Terms of the February settlement were not initially reported, but in a quarterly earnings filing this April, CA disclosed it expects $50 million in licensing fees from Rocket through 2014.
Rocket’s new cash hoard may, however, be used to invest more dollars in recent acquisitions like U2, Berman said. U2 consists of the UniData and UniVerse operating environments, as well as a suite of developer tools. It is prized as a platform that supports rapid development of applications that can handle many different categories of data.
With a base of loyal adherents and a history of neglect, U2 is ripe for investment, said Charles Barouch, a New York-based business and IT consultant who is president of the International U2 User Group. The product line came to IBM from a Massachusetts company called VMark Software, which developed UniVerse in the 1990s, and later acquired the UniData product from a Colorado company of the same name. In 2001, VMark merged with California-based Informix and sold the combined database business to IBM for $1 billion. Since then, the U2 product line has had little sales and marketing support from IBM, Barouch said. “We have no doubt Rocket is going to invest a higher proportion in them than IBM did.”
U2’s ecosystem of application developers, solution providers and value-added resellers has likely declined through attrition in recent years, said former VMark CEO Peter Gyenes, who now serves on the boards of Netezza Inc. (Nasdaq: NZ) and Pegasystems Inc. (Nasdaq: PEGA).
Rocket has a track record of expanding its acquisitions, like its 2005 purchase of Servergraph for $10 million. The Austin, Texas-based company had provided service for IBM’s Tivoli Storage Manager line of products. After acquiring it, Rocket extended the business into EMC, CA and Symantec data storage products.
Now, U2 has joined Rocket’s relatively small community of about 1,000 business partners, serving 10,000 customers.
As a fish in a smaller pond, the technology’s fortune may improve, Gyenes said. “I’m speculating that IBM decided that it was a little bit too small for their strategic focus — and that it would be better looked after by someone who would view it more strategically.”
Rocket CEO and co-founder Andy Youniss was traveling in the United Kingdom for a U2 users’ conference and could not be reached, Berman said. Court Square did not return a call placed to a partner in their New York office.
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