s an analyst and portfolio manager, it's not easy finding value in today's market. I guess I could just buy Intel and Microsoft and go play golf, but that would be too easy. Instead, I checked up on an old friend of mine that has been beaten down-Rational Software Corp., a leading provider of specification, modeling, implementation, and systems-testing software.
I raised concerns earlier this year about Rational's acquisition of Pure Atria, the leading company in the automated software quality and software-configuration-management testing-tools arena (IW, April 14, p. 108). What worried investors was the premium paid for the company, the integration of software, and the effects on the combined sales force. Let's revisit these issues.
With the antitrust review completed, shareholders will vote on the merger at the July 30 meeting. It's unlikely to be derailed, but there are still some disgruntled Rational shareholders that have seen their share price plummet from $40 to $10 in the last 12 months.
Until the vote is in, nothing is guaranteed.
Integrated software development has forged ahead. The first integrated software package tackling visual modeling will be ready by September, with more new products expected shortly thereafter. This is ahead of the original schedule.
One of the biggest concerns has been the assimilation of Pure Atria's sales force. The sales team was already turning over because of the clash of cultures when Pure acquired Atria. I've learned from discussions with Gerry Rudisin, VP of marketing for Rational, that there will be a reduction in sales-force head count, primarily from the Pure Atria ranks. The company will implement a new sales organization by the end of September. However, the transition is moving along, with regional and district teams already established.
Overall, the recent quarter showed financial improvement. The merger is even now generating some benefits, as bookings at Pure Atria strengthen backlog. Rational Rose, the company's development tool, cont
inues to gain market share. Rational isn't out of the woods, but there is definitely a clearing in sight. Execution over the next three to six months will be critical. Earnings guidance by management will probably be lower after the merger.
I project combined company earnings for fiscal 1999, ending March 31, will be in the 90 cents-per-share range, growing 30% annually. I have a target price of $25 over the next 12 to 18 months.
William Schaff is chief investment officer at Bay Isle Financial Corp. in San Francisco, which manages the InformationWeek 100 list. Reach him at
bschaff@bayisle.com
.
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s an analyst and portfolio manager, it's not easy finding value in today's market. I guess I could just buy Intel and Microsoft and go play golf, but that would be too easy. Instead, I checked up on an old friend of mine that has been beaten down-Rational Software Corp., a leading provider of specification, modeling, implementation, and systems-testing software.
