AttachmateWRQ Pays $495 Million for NetIQ

The consolidation continues apace in the software industry, and last week privately held AttachmateWRQ announced to its customers that it has acquired public company and security software provider NetIQ for a tidy sum of $495 million. This marks the third big acquisition that a group of venture capitalists have teamed up on together, beginning with WRQ in December 2004 and Attachmate in April 2005.

It also marks the end of the public and independent life of NetIQ, which was founded in September 1995 in San Jose, California, and which went public just as the dot-com boom was roaring at full throttle down the information superhighway. And NetIQ looked like it was going to be one of the survivors, too. Soon thereafter, NetIQ acquired Mission Critical Software for $1.4 billion in stock, plus made the smaller acquisitions of Ganymede Software, and Sirana Software, all to flesh out its systems management and security products. In January 2001, as the dot-com bubble burst but NetIQ was still flying high, the company ponied up $1 billion to buy WebTrends, the company that specialized in measuring Web hits and other statistics for the millions of Web sites in the world. In October 2002, NetIQ, which was focused predominantly on the Windows market when it started, acquired AS/400 and iSeries security expert PentaSafe; soon after that, NetIQ acquired Marshal Software.

But even with all of those acquisitions, NetIQ never seemed to be able to make any money. If has lost money every fiscal year from 2001 through 2005, when it brought in a combined total of $1.13 billion; in latter years, the company’s revenue has been declining. Stunningly, NetIQ lost $1.7 billion over that same period, and only eked out a profit of $46.7 million in the fiscal 2005 year ended in June because of extraordinary items relating to divestitures. NetIQ claims on its Web site that the company had 900 employees, 3,000 enterprise customers, and 60,000 customers, and it is amazing that something so large could lose so much money and still pay the bills. That public money went to good use: it employed a company with well-regarded products for over seven years. It is also amazing to remember that NetIQ was once valued at well over $4 billion during the book years.

NetIQ’s chief executive officer, Chuck Boesenberg, said in a conference call with Wall Street analysts that the all-cash buyout price of $495 million represented a 14 percent premium over the prior day’s market close and a 26 percent premium compared to what he called the company’s “enterprise value minus cash.” I am not exactly sure what he means by that, but NetIQ ended its third fiscal quarter of 2006 in March with $191.5 million in cash and short-term investments, and this money is being used, in part, to pay for the shares to take NetIQ private to be part of the AttachmateWRQ company. NetIQ did not have a question and answer during the call, and said that it would fully justify the striking price for the deal in a proxy statement, which it would file in a few weeks.

Presumably, at that time, the venture capitalists buying the company–Golden Gate Capital, Francisco Partners and Thoma Cressey Equity Partners–will show the math on why $495 million is a good value for NetIQ. Morgan Stanley was the advisor for NetIQ on the deal, and Credit Suisse, which is loaning the VCs some dough to do the deal, advised the board of directors for AttachmateWRQ.

Boesenberg said that the combined company would be called AttachmateNetIQ, and that NetIQ would be a business unit inside that company, which is headquartered in Seattle, Washington. He added that the combined company would have 40,000 customers and over 16 million users worldwide and would have “near complete penetration” of the Global 10000 companies. (That 40,000 number for the new AttachmateNetIQ is a lot lower than the 60,000 number that NetIQ cites on its own company history pages, obviously. Somebody misplaced a few ten thousand customers somewhere. . . .) The combined company has about $400 million in annual revenues, with roughly half coming from NetIQ.

“The combination of AttachmateWRQ and NetIQ creates a formidable enterprise software company with greater resources and scale,” said Jeff Hawn, chairman, president, and CEO at AttachmateWRQ, in a statement announcing the acquisition. “Together, we are well-positioned to better serve our combined customer base with more products and resources than ever before.”

In the call, Boesenberg explained the rationale for the deal. “After extensive review of strategic alternatives, NetIQ’s board and management team determined that the best way to maximize shareholder value and to better execute our strategy is to merge with AttachmateWRQ,” he explained. “We believe that under private ownership, we’ll have greater flexibility to execute our strategy and to increase our leadership position in our chosen markets.”

Ironically, the last quarter didn’t look so bad for NetIQ–at least not compared to other quarters. Revenues were $46 million, above guidance to the Street, and the net loss was only $3.9 million. NetIQ had actually increased its cash by $6.5 million and reduced headcount to 828 in the third fiscal quarter. The company said that it had 29 fewer sales people in this quarter compared to last year’s Q3, but was able to keep the same sales pipeline levels.

Going public might be a great way to grow your company, but it can be exhausting and destructive to chase profits to boost a stock price. In a way, I admire AttachmateWRQ and NetIQ for showing good sense and wanting to be privately held companies. But, not being accountable to the public can also be a problem, and venture capitalists generally acquire companies to flip them. It will be interesting to see if this band of VCs holds on to AttachmateNetIQ and turns it into a profit engine and simply holds on to it. I’ve heard of dumber ideas.

It is too early to tell what will happen with all of the combined company’s product lines. But we’ll be chasing that down for you once the deal closes in late June or early July.

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