Open Solutions Is Going Dot-Com

Another enterprise software company has agreed to a buyout: Open Solutions (Nasdaq: OPEN  ) , with a $38-per-share offer from two private equity firms, The Carlyle Group and Providence Equity Partners. Yes, it's a further indication that "smart-money" players see value in the software sector. But, in the case of Open Solutions, don't expect much more action on the stock price.

Open Solutions develops software for the financial services industry, helping with important things like data processing (for back office, reporting, lending, and transactions). There are also add-on products, such as customer relationship management (CRM) products, Internet banking, check imaging, and Web-based archiving.

The market for Open Solutions' products is massive -- estimated at about $20 billion annually. This has certainly invited competition such as Fiserv (Nasdaq: FISV  ) , Jack Henry & Associates (Nasdaq: JKHY  ) , and Fidelity National Information Services (NYSE: FIS  ) .

Yet Open Solutions continues to thrive. In the latest quarter, revenues increased to $107.1 million from $47.1 million and net income grew to $0.19 per share from $0.18.

The valuation of the deal is fair. The $38 purchase price represents a 32% premium over the average closing price for the last 30 days. Also, at its $775 million market cap, the company is selling at two times revenues (using the company's own 2006 revenue estimate). This multiple is typical for a software firm, although it's not as high as those in some other recent deals, such as IBM's (NYSE: IBM  ) purchase of FileNet.

What's more, keep in mind that funds like Carlyle Group and Providence Equity Partners tend to focus on bricks-and-mortar companies. But given the stability of customer contracts for software firms -- which often involve ongoing maintenance revenues -- the risk profile is acceptable. With cheap debt sources and huge amounts of private equity, we should expect more of these going-private transactions for software companies -- and probably soon.

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Fool contributor Tom Taulli does not own shares of companies mentioned in this article.


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