Progress Software :: For Sale

So, last week, Progress Software announced a retreat of sorts from the the BPM market.

Having purchased Savvion BPM and a clutch of other products to make Responsive Process Management (RPM), they have now announced the divestitures of Savvion BPM, the Sonic ESB and 8 other ‘non-core businesses’.

The analyst coverage has already dissected the transaction. If you are interested, I would recommend Neil Ward-Dutton’s post and the Forrester post written jointly by three of their analysts.

Both view the strategy as risky.

Here is a substantial section of the Forrester post that tells the story:

Progress isn’t falling apart; rather, the company is making a second attempt to grow into an integrated enterprise vendor – this time with less baggage. In its first 25 years, Progress was a portfolio company selling technical components to other vendors. There was no ‘whole greater than the sum of the parts’ for the company. The first attempt to weave Progress’ portfolio of products into a set of high-value enterprise solutions collapsed under the weight of all of those products, many of which were commoditized and not growing. Now Progress will focus on just three areas.

The transformation strategy is the same: Use products that generate strong revenue and profits but grow slowly (Open Edge) to fund investment in products with strong growth potential for the future (Apama with Corticon, DataDirect). The focus is just tighter this time.

via Forrester Research

I’m not so sure that this is a plan to build anything. To me, it feels to me more like an exit strategy.

A Plan for a Sale

The problem with portfolio businesses like Progress is that they are unattractive acquisition targets unless:

  1. You want to own the whole portfolio which is unusual.
  2. The value of 1 asset in the portfolio is so great it justifies the hassle of dealing with the rest of the portfolio, in which case its not really a portfolio company at all.
  3. The strategic value of some part of the business justifies buying everything and getting rid of the businesses that you don’t want. This is similar to the second point but is more driven by the synergeries with your existing business.

Progress probably would have struggled to fit into any of these categories. The core business delivered $361 million of revenue in FY2011 but the 10 non-core products delivered $172 million. – meaning that no single business dominated the portfolio and there is a lot of businesses in the mix.

Forrester continues:

The catalyst for Progress’ shift: activist investor Starboard Value LLP. Starboard’s public letter to new Progress CEO Jay Bhat laid out the ugly financial picture the company had become. PRGS rose substantially after the announced strategy shift, as you’d expect from the promise of a cleaned-up balance sheet. But the hard challenges of future growth remain. [… The Open Edge Product] remains primarily interesting to long-time Progress ISVs, not the broader market. Persuading the wide world of developers to even consider OpenEdge will be an immense task.

via Forrester Research (Emphasis added)

This makes sense — It’s difficult for the business to unlock value through a trade sale so it has undergone a second strategic restructuring under pressure from an activist shareholder group.

What is less certain is the endgame.

The analysts have assumed Progress have made some bold and risky decisions to reposition themselves in the market. I might agree but for a different market.

After the announcement, the core Open Edge product group has a clear value proposition for a strategic buyer – You would be buying an aging but cash generative business.

Similarly, the non-core businesses often have highly regarded technology and growth potential. Others are niche products but profitable.

Suddenly, every part of the business has more obvious potential buyers.

So, here is the prediction:

The non-core businesses will get sold and spun-out over the next 12 months to clean up the balance sheet and Progress itself will get acquired in 2013.