Rather than sell off its integrated development environment tools business, Borland Software announced that it will instead spin its developer tools group off into a wholly owned subsidiary known as CodeGear.
In an interview with eWEEK, Borland chief executive Tod Nielsen said he decided to keep the company, to be known as CodeGear, in the Borland fold—albeit as a separate entity—because he did not believe any of the prospective suitors would be able to “reflect the core value of the asset.”
Borland, of Cupertino, Calif., announced the news during its earnings call on Nov. 14.
Nielsen said that none of the many offers Borland received for its developer tools unit satisfied the high standards he had set for a sale to be completed, namely protection of the technology base, the developers and the overall value of the entity.
Indeed, Nielsen said in talk with bidders he realized the unit was more valuable than he anticipated.
“We talked to a number of bidders, but one of the things we struggled with was showing true independence, because bidders would ask us about some of our bigger deals,” Nielsen said.
“Theyd ask us which part of the company drove the deal: the IDE [integrated development environment] part or the ALM [application lifecycle management] part.”
So Nielsen said he did not get the sense that many of the bidders would adequately carry the Borland tools heritage forward and he essentially decided to do it himself.
“I didnt feel like we were getting the value of the overall business,” Nielsen said of the bids he turned down.
Thus the decision to form CodeGear was the best move “for our customers, shareholders and employees,” he said.
Borland officials said a number of interested parties approached the company about its tools business, but Borland narrowed that number down to five “serious bidders” who were involved in the due diligence process.
The company would not disclose the value of the top bid, nor would it offer any estimate of what it projects the value of the tools unit to be.
However, a company spokesperson said: “In Q3, the IDE revenues were approximately $15 million. In fiscal year 2005, IDE revenues were approximately $90 million.”
Borland announced plans to spin off its developer tools unit, which became known internally as “DevCo” as it awaited a buyer, last February.
However, the so-called divestiture of Borlands tools unit was not to come through a sale.
Instead, CodeGear remains close to its Borland roots and will occupy what to this point has been the Borland facility in Scotts Valley, Calif., and Borland will maintain its headquarters in Cupertino, Calif., Borland officials said.
“Our goal was to drive as much separation as possible [between Borlands ALM business and its IDE unit], and were still doing that, but the IDE company will still be owned by Borland,” Nielsen said.
“They will have their own brand, their own HR [human resources], their own G&A [general and administrative costs], their own roadmap; the difference is I will be the owner of CodeGear instead of some other entity.”
CodeGear will be responsible for advancing the four primary IDE-related product lines, including Developer Studio, which consists of Delphi, C++Builder and C#Builder; JBuilder, including the upcoming “Peloton” version of JBuilder; Turbo and Interbase.
These tools will maintain their product names, but will be delivered under the CodeGear brand, Nielsen said.
“Weve seen amazing growth in the ALM space,” Nielsen said. “Weve been seeing lots of positive momentum.”
For its third-quarter 2006 earnings, Borland announced a 22 percent increase in total revenue over last year, a 90 percent increase in revenue from ALM products alone, and ALM license revenue was up 117 percent over the prior year.
“When I said we were going to do 10 percent revenue growth for the year, the critics laughed,” Nielsen said, but now that is a reality, he added.
However, in its third-quarter earnings report Borland shows it is still operating at a loss, said Rick Jackson, Borlands chief marketing officer and vice president of corporate strategy.
Yet, Borland hired a new chief financial officer, Erik Prusch, who most recently was vice president of finance at Intuit, where he oversaw the financial operations of Intuits largest revenue-generating business unit—the Consumer Tax Group, Borland officials said.
Prior to that, Prusch was CFO for Indentix., an identity management company.
“We hired the new CFO to look at more operational efficiencies we can drive into the business,” Jackson said.
“We wont be profitable in Q4 as Tod projected, but 2007 will be a profitable year for us.”
Meanwhile, Nielsen announced that CodeGear will be led by Ben Smith as its new Chief Executive Officer.
He said Smith is a seasoned technology executive who has been working with Borland and the Developer Tools Group for the past 12 months and will continue to work closely with CodeGears existing leadership team to deliver on the business plan and product roadmaps the team hammered out during the divestiture process.
And as a subsidiary of Borland, CodeGear will have a separate brand, management team, research and development organization, marketing strategy and global operating infrastructure.
The two businesses are expected to be separated and reporting broken out financials in early 2007, Nielsen said.
“We believe by creating two separate operations, Borland and CodeGear can both obtain the necessary focus and dedicated resources to serve two important, but distinct markets,” Nielsen said in a statement.
“We will continue to partner and share a mutual view of customer success. However, going forward Borland will be completely focused on leading the ALM market, while CodeGear will be focused on the software developer.”
“Were taking on IBM Rational, Mercury, or whoever else,” Nielsen told eWEEK of Borlands future direction as an ALM company.
“ALM is an extremely challenging space; Borland is up against the largest competitors in our industry in this market—IBM Rational, Microsoft, HP/Mercury, CA, and others such as Serena, Compuware, Telelogic, etc.,” said Melinda Ballou, program director, Application Life-Cycle Management at industry analysis firm IDC in Framingham, Mass.
“Yet a variety of factors are driving life-cycle growth—for example, complex sourcing with offshore/outsourced development, compliance initiatives, SOA [service-oriented architecture] emergence—which expand the pie as a whole and create opportunity, assuming the company is able to focus its marketing and product strategy effectively,” she added.
Moreover, “Key for Borland in the ALM arena is execution and coordination with the best practice approaches of its consulting arm acquired with Teraquest last year, which is differentiating,” Ballou said.
A Long, Hard Battle
Theresa Lanowitz, an analyst with Voke, in Minden, Nev., said Borland is in for a fight in the ALM space.
“Borland is in, and has been in, for a long, hard battle,” Lanowitz said.
“In the IDE wars, Borland was a necessary third-party alternative to both Microsoft and IBM. However, in the ALM market there are plenty of competitors to IBM and Microsoft—namely, HP (with the Mercury acquisition), Empirix, Compuware, Serena, CA, etc. And, there are many acquisitions still to come.
“The point here is Borland is not a necessary competitive element in ALM as it was in the IDE market. Borland has generated limited market awareness for its ALM products.”
Lanowitz said Borland has always been a company based on technology for technology workers.
Yet, in Lanowitzs view, the technology worker has moved beyond the enterprise and into the ranks of outsourcing agencies—either third-party consulting groups or offshore providers.
“Borland shows little ability to move beyond a technology sell and penetrate the market with their application lifecycle offerings,” Lanowitz said.
“Additionally, they show no interest in becoming a niche player for outsourcers. The latter of these two options is certainly a place where Borland could shine.”
Jim Duggan, an analyst with Gartner, in Stamford, Conn., said: “I think Borland has a good story, but has 18 months at most to get the momentum rolling before Microsoft, IBM and HP get their respective ALM campaigns too established.
“In some ways the same concerns apply to Serena, MKS, Aldon and perhaps even Compuware. BEA has to get some sort of play going as well, and they dont even break water in this space yet.”
Meanwhile, as Nielsen must focus on the ALM market, CodeGears Smith said he is ready to take on all comers in the IDE space, including open source and Microsoft.
The formation of CodeGear “gives the business an opportunity to serve developers exclusively and give them the tools they need to achieve success.”
Nielsen said that despite having two separate companies, there will be some future collaboration and integration between Borland and CodeGear, including cross-selling opportunities.
However, “CodeGear can go out and do some integration with folks like [IBM] Rational, and well be doing stuff with Microsoft around Visual Studio and things like that.”
And despite her warnings, Vokes Lanowitz, who also used to work at Borland, says Borland is not necessarily a company to bet against.
“Tactically, Borland can execute,” Lanowitz said. “Years of lean living has bred an incredibly scrappy group of individuals to execute tactically and at all costs.
“Borland does an admirable job of truly doing more with less. As Borland makes its way to being a true enterprise purveyor, they must move beyond the mentality of delivering quarterly products to make a goal.”
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