From its start in 1976, Computer Associates (NYSE:CA) blazed an aggressive growth path through acquisitions. The CEO, Charles Wang, was a hard-charging executive who had a reputation for cutting jobs.
But, a few years ago, CA plunged into an accounting scandal. A new management team came in -- led by a former IBM (NYSE:IBM) executive, John Swainson -- and the acquisition strategy was halted.
Well, CA is now back in the deal game. In fact, over the past year, the company purchased PestPatrol, Concord Communications, and Netegrity.
Then, yesterday, CA announced a $350 million deal to purchase Niku (NASDAQ:NIKU). It was certainly a nice surprise for Niku shareholders, who saw the stock price surge 25% to $20.66.
This is a relatively small transaction for CA. After all, CA generated about $3.5 billion in sales during the past year and has about 15,300 employees. With $3.1 billion in the bank, there is no need to get financing for the deal.
Niku's flagship product is Clarity. Essentially, it provides a company with a comprehensive, real-time view of its information technology (IT) infrastructure. It helps with the complete life cycle of an IT project -- from the idea stage to implementation and ongoing maintenance. Along the way, Clarity tracks metrics on the projects such as achievements of milestones, return on investment, and resource usage. Employing the aforementioned resources, a company can conduct "what-if" analysis -- examining potential outcomes given the effect of a series of factors' actions/movements.
Clarity is based on a Web services architecture, thus allowing for easy access through a Web browser and can scale from as few as 20 users to more than 100,000.
Moreover, the growth rate for Niku has been strong (revenues increased more than 40% last year). A big part of this comes from new compliance requirements, such as Sarbanes-Oxley and HIPAA. To comply with these laws, companies need effective methods to monitor internal IT resources.
Since January, CA has had a reseller agreement with Niku. Quickly, CA saw immediate traction in terms of customer demand and realized that Clarity would be a strong strategic fit. In a way, this deal is an example of CA playing catch-up after several years of being distracted by regulatory matters. In the meantime, its competition -- such as Oracle (NASDAQ:ORCL) and IBM -- gained ground.
The good news is that with its problems behind it, CA can focus on its business. And the quickest way to get growth is through acquisitions. Actually, with the recent slowdown in the software sector, the valuations are much more attractive and management perhaps more willing to sell out. So expect more deals from CA going forward.
Unfortunately, much of CA's business is mature, with little growth. Even though Niku is growing rapidly, it will not be enough to move the needle. Rather, the play is to find companies such as Niku that represent good targets for plodding companies such as CA. Bear in mind, this strategy is not without risk. Would-be investors would be best served to find companies that possess strong fundamentals -- and if acquired by the likes of a CA, all the better.
Fool contributor Tom Taulli does not own shares mentioned in this article.
