Borland (Finally) Sells CodeGear to Embarcadero

Yesterday Borland Software Corporation announced today a definitive agreement to sell the assets of its individual developer tools unit, CodeGear, to privately held Embarcadero Technologies. The purchase price for CodeGear is expected to be approximately $23 million. Borland will also retain CodeGear’s accounts receivables with an approximate value of an additional $7 million. The transaction is expected to close by June 30, 2008.

Borland made this announcement the same day that it announced a GAAP net loss of $22.3 million for the first quarter of 2008. Borland has been loosing money for quite a long time, at least since it already tried to sell its tools division at the end of 2006, before setting an independent entity named CodeGear. In 2007, Borland already reported a GAAP operating loss of $61 million for the year compared to a loss of $53.1 million in the prior year.

For 2007, CodeGear reported $57 million in revenue and Borland total revenue were $268.8 million. The price paid by Embarcadero is therefore around 50% of yearly revenues. This could be compare for instance with the price paid last year by IBM to acquire Telelogic, which was around 300% of 2007 revenues. Borland management has been accusing the tool division for dragging down profitability for a long time. It is more difficult today to be active in this market area, when most developers could use free open source solutions like Eclipse or NetBeans. Even commercial editors like Oracle or Microsoft offer a free basic edition of their IDE. With this transaction, we will finally able to judge Borland’s management on its ability to develop the other products (Silk, Caliber, StarTeam, etc.)

The question is why would Embarcadero buy such an apparently bad business? First, its current product is centered around database development, so there is no redundancy with CodeGear programming tools… but the management could see redundancies in the sales and administration people and cut a large part of the costs. With a “small company” culture, Embarcadero could be used to a more controlled spending that people used to the large pockets of Borland. Due to the price paid, Embarcadero is taking a relatively small financial risk, as it could have more easily a positive return on its investment with CodeGear recurring revenues. Finally, as Embarcadero was until now active on a “niche” market (database tools), it could have been less sensitive to the competition in the IDE segment.

It has to be noted that CodeGear has also made recently good efforts to explore new markets, like PHP and Rails, different from its existing Delphi, C and Java base. This could provide a good opportunity to cross-sell products through existing customer base. I hope that the growth forecasts announced in the acquisition press release will realize for the benefit of employees of these two companies, but I think that the expansion of diffusion of free open source and commercial competing products will make it very difficult to achieve them.

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