Informatica: Acquisition Target?

Informatica Corporation (NASDAQ: INFA) is a leading data integration enterprise that serves over 2,850 companies worldwide for their end-to-end data integration needs. The various enterprise-wide data integration and data quality solutions that its products support encompass a vast range including data consolidation, data synchronization, data governance, and data warehousing.

INFA’s data quality products also support such necessities like data migration, master data management, and cross-enterprise data integration. There is therefore a lot of business sense for it when Cognos (NASDAQ: COGN), the BI major, comes calling for sewing up a worldwide strategic relationship.

Under the agreement made last week, COGN will resell INFA’s Data Quality and Data Explorer products as part of its performance management portfolio. Says Mel Zeledon, SVP of Global Alliances at Cognos, “With proven software from Informatica, combined with our Data Quality services focused on performance management, we can address data quality issues that span the full breadth of performance management data, not just customer data typically found in other solutions.”

As part of the data integration challenge for the on-demand world, INFA has lined up several initiatives. Its first enterprise offering is the PowerCenter Connect Option for Salesforce.com, which is aimed at companies’ bridging the gap between their salesforce.com implementations and their on-premise software applications. SaaS Integration, by the way, is a hot problem for which companies such as Salesforce.com require a solution.

The other of the same genre is its SP3 program. SP3 provides outsourcers, application service providers, the ASPs, and the SaaS vendors access to its data integration solutions on a subscription basis.

Informatica’s 2006 revenues were $325 Million, with almost an 80% gross margin. However, SG&A and R&D together ate up most of the margins, leaving a paltry $36 Million in Net Income. Current Market Cap stands at $1.34 Billion, making it an attractive acquisition target.

INFA did well in Q2/07 when its revenues recorded 17% y-o-y growth from $80.8 million to $94.3 million. H1/07 revenues were $181.4 million as against $153.9 million in H1/06 (+18% y-o-y). The share of license revenues for Q2/07 stood at $41.8 million, up 14 percent from the $36.9 million in Q2/06. Similar figure for H1/07 was $79.4 million, which was an increase by 14% from H1/06’s $69.7 million.

Notably, the GAAP net income for Q2/07 was $10.5 million that translated to $0.11 per share, up 37% from corresponding figures of Q2/06 that were $7.6 million or $0.08 per diluted share. An over 50% GAAP net income jump between H1/06 and H1/07 was even more spectacular from $12.9 million ($0.14/share) to $19.6 million ($0.21/share).

INFA’s stock performance has been lacking luster. Though it is presently trading ($15.23 level) somewhat close to its 52-week peak of $15.79, the difference between the 52-week high and low is small (52-week low $11.37).

Significantly, INFA’s price-earnings multiple (34.93) is closer to that of COGN (30.37) than to Business Objects (NASDAQ: BOBJ) which enjoys a significantly higher multiple of 53.

In my opinion, INFA is a strong acquisition target for either Oracle (who acquires everyone and their mother in Enterprise Software), or, (and this would indeed be more interesting), for Salesforce.com. The latter needs glue to stitch together all sorts of applications inside the enterprises, and Informatica would be happy to oblige. It would, however, be a relatively larger acquisition to digest for Salesforce.com, whose own market cap is at $5.7 Billion, with an unreal P/E of 1,127.21. Salesforce.com (CRM) has an annual revenue level close to $500 Million, and can effectively amortize INFA’s SG&A expenses to extract efficiency and profits.