Smaller Firms Buy Overseas Shops

[Brigitte Xu]

Smaller Firms Buy Overseas Shops
2006/09/18 Author:Brigitte Mood: Monday (21:51)
When WebMethods Inc. looked at tiny California technology firm Infravio Inc. as an acquisition candidate, the Fairfax company knew that Infravio's product would be a perfect fit for its software suite. But from ********.com the real head-turner about the 65-person start-up was the location of its employees: 50 software developers in Chennai, India.

Analysts consider the $38 million WebMethods paid to be a premium price for a small company that made less than $1 million last year. In the long run, though, the purchase plays into the cost-cutting strategy WebMethods has adopted after four years of falling stock prices, roller-coaster revenue and accounting problems.


Two years ago, WebMethods opened its 58-person India Development Center in Bangalore, and chopped millions of dollars from its budget as a result. The Infravio purchase nearly doubles the company's presence in India.

While large technology companies have been moving research and development resources overseas for nearly a decade, such outsourcing has also become important for small and mid-size software firms.

"Like a lot of software companies, WebMethods is trying to rationalize its costs by having as much research and development offshore as they possibly can," said Irit Elrad-Jakoby, an analyst that follows the company for Next Generation Equity Research LLC in Chicago.

WebMethods, which has 840 employees around the world, makes software that lets different applications in a computer system work together.

Since opening its Bangalore center in 2004, WebMethods saved $5 million in research and development expenses, which totaled $40.2 million for the year ended March 31, according to the company's annual report. The decrease, the company said, "was primarily the result of increasing the proportion of our product development staff in Bangalore, which has lower personnel and operating expenses than our product development centers in the United States."

Analysts said WebMethods, which reported a $5.8 million loss in its first quarter ended June 30, will most likely expand its staff in India. After going public in 2000, the company's stock price has been steadily dropping from a peak of around $100 in 2001. WebMethods closed Friday at $8.17, down 13 cents.

Ten WebMethods executives have resigned in the past two years, and the company restated its 2004 financial earnings after discovering accounting errors by employees in its Japanese subsidiary.

Mark L. Wabschall, WebMethods' chief financial officer who will leave the company at year-end, said he expects the acquisition to lower earnings in the next three months before turning out a profit by the end of March.

Infravio's presence in India "is a sweetener for this deal, and not a trivial one," said Gregg Moskowitz, an analyst with the Susquehanna Financial Group.

"The bar to make this an accretive transaction is much lower due to Infravio's low cost structure."

Other Washington area companies have also taken the plunge into the overseas technological talent pool. Business and government information technology provider IMC Inc. of Reston employs 120 developers in its subsidiary in Pune, a town south of Mumbai.

Indus Corp., a Vienna-based firm that sells information technology services to the federal government, opened a subsidiary in Bangalore four years ago with six developers to maintain internal support systems. The office now has 30 employees and will have more than 200 in the next two years as the company goes after more commercial clients, chief executive Shiv Krishnan said.


Acquisitions are often the easiest way for U.S. companies to enter the foreign market, said J. Muir Macpherson, assistant professor of strategic management at Georgetown University's McDonough School of Business.

"We're going to see a lot of deals that are taking advantage of an established workforce overseas," he said. "Buying up the operations of a company already based in a foreign country can solve a lot of problems and reduce a lot of risk."

Peter S. Kastner, vice president of IT research for the Aberdeen Group, a Boston market research firm, said venture capitalists are looking for companies with offshore development branches now that the market in India is maturing.

"The economics of the software business are such that you can't get venture capital funding unless you can show that you do research and development economically," he said. "So they're demanding an offshore outfit before they'll fund companies."

By stretching into India, where development resources are readily available at a small fraction of U.S. prices, small start-ups can also catch the attention of larger companies looking to make promising investments.

Manugistics Group Inc., a Rockville software company with 200 developers in , India, found that out in July when it was bought by Arizona-based JDA Software Group Inc. for $213 million. While Manugistics' presence abroad wasn't the main reason for the acquisition, "it was an added bonus," said Jenni Ottum, a JDA spokeswoman.

Infravio is the second company acquired by WebMethods in the past month. The company bought privately held Cerebra Inc. in August for an undisclosed price.

Keyword: WebMethod technology development
Content Classification: Family Business

[amberwilliam]

The article's great and Brigitte's blog is great!!

[peterjhale]

I guess that amberwilliam and bridgette posting from the same IP address is just a coincidence then ?

[GregC]

......lol

[flyingcards]

******** is a great site for those who can read Chinese? As I can't I will give it a miss. I don't really understand what bridgitte's post are trying to achieve
anyone can cut and paste an article!

[Ian J]

Originally Posted by flyingcards

I don't really understand what bridgitte's post are trying to achieve

anyone can cut and paste an article!

It isn't the article that is important but the hyperlink to the website. Initially these links were being removed by the moderators but due to the ever increasing amount of people posting links to the same website it was deemed easier just to put the website's address in the swear filter.

People seem to think that if Google can pick up inbound links to their websites it will benefit their ranking but hopefully now that the links are being trashed by the swear filter these people will go away and spam someone else.