Micromuse Acquires Quallaby

OSS vendor Micromuse Inc. (Nasdaq: MUSE) is to buy performance management software specialist Quallaby Corp. for $33 million in cash (see Micromuse Buys Quallaby).

The news sent Micromuse's share price up 25 cents, more than 5 percent, to $4.95 in pre-market trading.

The deal is significant in two key respects. First, Micromuse has been accused by industry analysts of resting on its laurels in the fault management space and being risk averse when it needed to be more aggressive. That approach to the market, and some accounting problems that dealt a blow to the company's valuation, led to suggestions last year that Micromuse might even become an acquisition target (see Is Micromuse Ripe for the Picking?). This deal at least addresses some of those issues, giving Micromuse a foot in the door of the performance management market that, with the increasing shift towards converged IP networks, is likely to be one of the OSS market's key growth areas.

Which leads to the second key point: Quallaby has already been chosen for one of the world's most high profile all-IP network projects -- BT Group plc's (NYSE: BT; London: BTA) 21st Century Network (21CN) project (see BT Picks Quallaby's OSS, BT Pins Down OSS Deals, and BT Moves Ahead With Mega Project).

While BT has been one of Micromuse's many carrier customers, the software vendor is not yet among the OSS firms named as a 21CN supplier partner. This acquisition boosts its chances.

Clearly, BT values Micromuse as a supplier. In today's press release, BT's head of customer network reporting design, Phillip Radley, stated: "With this acquisition, Micromuse strengthens its leadership in IP service assurance and further distances itself from other packaged vendors in the assurance space. Our company invests only in service assurance software that has proved its functionality and performance under the most challenging conditions. Both Netcool and Proviso have demonstrated this standard within BT’s network, so from our perspective this is a very logical and promising combination."

Micromuse's senior VP for Europe, Richard Lowe, notes that BT was "our founding customer in the 1990s, and we have been managing BT's IP network infrastructure ever since. Because of the relationship, we have been talking extensively with BT about its plans. I can't comment specifically on 21CN, but with Quallaby already named for 21CN, that's clearly a good sign."

Lowe adds that performance management will become an increasing issue as carriers converge their infrastructures and run their services across fewer networks, "and we had to decide whether to build or buy. We decided we couldn't build anything as good as Quallaby's product."

And he believes Quallaby's Proviso product will give Micromuse an edge in a key area: scaleability. "Convergence is going to result in a massive increase in the number of IP events that need to be managed on a network, and any software company will tell you that the most challenging aspect is building scaleability. We can see Quallaby has that, so while Hewlett-Packard, for example, is a very good company with very good products, I'm sure it and others will face some major challenges in the future."

Adds Lowe: "We know our major partners, Alcatel, Accenture, and IBM Global Services, are very excited about taking this product combination to the market."

So what else is Micromuse getting for its money? Well, Quallaby already has a number of high-profile carrier customers, including France Telecom SA (NYSE: FTE), Scandinavian giant TeliaSonera AB (Nasdaq: TLSN), and Telus Corp. (NYSE: TU; Toronto: T), as well as infrastructure partners (see Alcatel Provides OSS to Sunrise and Juniper Touts OSS Edge).

Quallaby is also a rising star in the eyes of service providers, according to the results of Heavy Reading's 2005 OSS Market Perception Study, in which Micromuse topped the overall rankings (see Report: OSS Minnows Have Muscle). In the performance monitoring section of the report, Quallaby rose to ninth from its previous 11th place, and was recognized as a player in that market by one fifth of the service provider respondents.

Micromuse won't say at this point what sort of revenues Quallaby will bring with it, but Lowe says the acquisition is expected to be neutral in the current financial year (ends September 30), and positive to earnings the following fiscal year. Lowe adds that it is important that Micromuse make this acquisition without incurring debt. He says the firm has $200 million in cash and no debt.

OSS Observer analyst Patrick Kelly estimates Quallaby's revenues were about $7 million in 2004, giving the deal a price to revenue multiple of 4.7. "We think the high premium was driven by strong growth for Quallaby during the past year. A $10 million, three-year deal at BT for customer network reporting will account for the majority of Quallaby's revenue this year," reckons Kelly.

"We view this acquisition positively. Micromuse needed to expand its product portfolio in the performance monitoring segment to address the high growth service management market," notes the analyst in an email response to questions.

He adds that the deal also puts Micromuse in a stronger position to compete against competitors such as Agilent Technologies Inc. (NYSE: A), Hewlett-Packard, Concord Communications Inc. (Nasdaq: CCRD) and InfoVista SA (Nasdaq: IVTA) in the service assurance market.

He adds that Micromuse had "developed a stronger partnership relationship with InfoVista in August 2004, but with Quallaby in the fold, we do not expect any cooperative selling going forward" (see InfoVista Teams With Micromuse).

Quallaby has raised more than $50 million in funding from investors such as Adams Street Partners, Commonwealth Capital Ventures, Galileo, Harbour Vest Partners LLC, Matrix Partners, North Bridge Venture Partners, and Partech International.

The deal comes just a day after Computer Associates International Inc. (CA) (NYSE: CA) bought rival performance management firm Concord for a whopping $350 million in cash (see CA Grabs Concord). Concord came seventh in the Heavy Reading report's performance monitoring rankings.

— Ray Le Maistre, International News Editor, Light Reading

For more on this topic, check out the Heavy Reading report: 2005 OSS Market Perception Study