webMethods' Last Hurrah

With its stock in a rut since 2004, webMethods (Nasdaq: WEBM  ) finally found a way to boost its share price. Last week, the company agreed to sell out to Germany-based Software AG for $546 million in cash. Since March, the stock price has soared 42%, but investors shouldn't expect much more.

webMethods develops software to help with service-oriented architecture (SOA) deployments. This makes it easier for companies to meld together different computer systems. It's increasingly important feature, as globalization and mergers and acquisitions more frequently knit together far-flung firms.

Software AG wants to extend its focus beyond mainframes, hoping to eventually double its annual revenue to $1.3 billion by 2011. Buying webMethods will help Software AG secure $209 million in revenue and more than 1,500 customers.

It's also a smart deal for webMethods. Despite a strong product line and smart acquisitions, the company has failed to grow its business. Fiscal third-quarter revenue increased just 1% to $53.1 million, while license revenue plummeted 10% to $19.7 million.

Might other bidders come to the table? Some investors seem to think so, since webMethods' stock price is trading slightly above Software AG's $9.15 buyout offer. Rumored suitors include Oracle (Nasdaq: ORCL  ) , BEA (Nasdaq: BEAS  ) , Hewlett-Packard (NYSE: HPQ  ) , SAP (NYSE: SAP  ) , and IBM (NYSE: IBM  ) .

On its most recent conference call, webMethods CEO David Mitchell said there was "substantial strategic interest" in the company. But at two times revenue, the buyout valuation seems fair in light of webMethods' sluggish growth, net losses, and falling license revenues. I'd say that shareholders who bet on another bidder are probably in for yet another disappointment.

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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is ranked 2,719 out of 25,386 in Motley Fool CAPS.


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