Business Objects (Nasdaq: BOBJ ) , which develops business intelligence software, hit a key milestone over the past year: $1 billion in revenues. But, to keep the growth moving, management realizes it needs to continue to innovate -- which often means buying small companies. The most recent deal is the $56 million purchase of Armstrong Laing Limited (ALG), which should help fill some holes in Business Objects' product offerings.
Business Objects is a software powerhouse, with over 39,000 customers (including 80% of the Fortune 500). The company's software helps customers track, manage, and understand data.
Take one of its customers, UBS (NYSE: UBS ) , which needed to get faster access to information. With Business Objects, it was able to do this, as well as maintain compliance with a variety of regulatory requirements, such as Basel II and Sarbanes-Oxley. As a result, UBS can store and process 20 million to 30 million data entries per day, across the globe.
As for ALG, it is a privately held software company that focuses on the enterprise performance management (EPM) market. Huh? Well, this basically means helping companies better manage things like staffing, payroll, and capital spending.
It's a big category and ALG specializes in the profit-management side of it. And, over the years, it has built a customer base of more than 400, including biggies like American Express (NYSE: AXP ) , British Telecom (NYSE: BT ) , and HSBC (NYSE: HBC ) .
At the end of January, ALG had revenues of $19 million. Thus, the valuation is roughly 3 times revenues, which is a fair price for Business Objects to pay. Furthermore, Business Objects should be able to get lots of traction by distributing the ALG product line through its extensive customer channels.
What about Business Objects as an investment? While the company has a solid product offering, there are red flags. In the second quarter, revenues from software licenses fell 1% to $123.1 million. In other words, the growth for the company is coming from services, not software sales. Also, net income fell from $23.1 million to $7.9 million.
There has also been speculation that Oracle (Nasdaq: ORCL ) may make an offer for the company -- which has helped to boost the price over the past month, from $25 to $30 per share. While there has been a pick-up in M&A activity in the software sector, it is a dangerous game to chase potential takeover targets. So, for the near term, caution is in order for this stock.
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Fool contributor Tom Taulli does not own shares of companies mentioned in this article.
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