Open Text has focus on M&A targets

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

Chief executive Mark Barrenechea says he knows exactly what assets the US$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, Ont.-based firm expects to generate US$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 buybacks and the rest for growth, including mergers and acquisitions.

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 M&A in the first half of the year.

In Canada, the value of deals in 2021 has already exceeded 2020, excluding any terminated or withdrawn deals.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 per cent to US$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 per cent and repurchased US$119 million worth of shares. The stock closed at a record US$52.62 on Aug. 6, the day after the earnings call.

The firm is pivoting to focus on organic growth, which Barrenechea said is “back and here to stay.” The target is organic revenue growth of as much as four per cent. The information-management technology industry is worth US$84 billion and should grow at an eight-per-cent compound annual rate between 2021 and 2024, Open Text said.

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.”