Market Overview

BMO Upgrades Open Text To Outperform, EMC Deal Could Lead To Significant Synergies


Following the announcement by Open Text Corp (USA) (NASDAQ: OTEX) of the acquisition of EMC Corporation’s (NYSE: EMC) Enterprise Content business, BMO Capital’s Thanos Moschopoulos believes the deal could lead to significant synergies.

Moschopoulos upgraded the rating on Open Text to Outperform, with a $73 price target.

The Deal

“While organic growth might remain a challenge for the combined business, in our view the cost synergy story alone should be sufficient to drive further upside to the share price over the next 12-18 months,” the analyst mentioned.

Moschopoulos estimated that the deal would be 17-19 percent accretive to Open Text’s FY2018 adjusted EPS.

Open Text has signed a definitive agreement to acquire EMC’s Enterprise Content division, including Documentum, for an offer price of $1.6 billion. The transaction is expected to close in 90 to 120 days.

“Open Text has lined up a $1 billion debt commitment to finance the transaction, although the company is exploring other options and might ultimately choose to issue some equity,” Moschopoulos stated.

Accretion From The Deal

The analyst also pointed out that while Documentum has been facing challenges to growth, its products are good and the growth challenges might be related to the maturity of the high end content management market that EMC focuses on and/or due to a lack of attention from the parent company.

Moschopoulus believes that following the integration of this acquisition, Open Text “will ultimately have a more compelling product offering than before—which might bode well for its longer-term organic growth.”

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Latest Ratings for OTEX

Jan 2020MaintainsNeutral
Nov 2019MaintainsOutperform
Oct 2019Initiates Coverage OnSell

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