CA to Acquire Arcot Systems

New York-based CA Technologies Inc. (CA - Analyst Report) signed a definitive agreement to acquire privately held Arcot Systems Inc. for a total cash consideration of $200.0 million.

CA Inc. expects the deal to close by the end of the second quarter of fiscal 2011 (ending September 30), and to be dilutive to fiscal 2011 GAAP earnings but slightly accretive to its non-GAAP earnings. Following the acquisition, CA Technologies will integrate Arcot’s operations with its Security business.

Founded in 1997, Arcot has evolved as a leading provider of cloud-based digital signatures and identity solutions. Arcot's solutions provide safe Web transactions and online access to its users and can trace and prevent frauds while checking about one million online credit card transactions every day. The long list of organizations depending on the company’s online fraud and identity theft preventing solutions include financial institutions, pharmaceutical companies, enterprises and eShopping sites.

The acquisition of Arcot will enable CA Inc. to add fraud prevention and advanced authentication features to its security portfolio or Identity and Access Management (IAM) solutions. CA expects the Advanced Authentication market to grow at low double digits over the next four years. Hence, we expect that Arcot’s offerings will be able to drive revenue streams from CA Inc.’s IAM business. Additionally, CA Inc. may benefit from potential cross-selling opportunities.

Arcot’s technology will augment CA Inc.’s SiteMinder portfolio in particular, securing users’ business transactions and thereby reducing security threats. The added and enhanced features are expected to attract new customers interested in Web-based businesses.

Given Arcot’s subscription-based recurring revenue model and positive cash flow, we believe that the deal is strategically positive for CA Inc. Moreover, Arcot has an almost 100% customer retention rate, a further indication of the quality of its offerings.

We remain encouraged by CA Inc.’s growth strategy, enhancing its IT management and security software and services portfolio through consecutive acquisitions. Earlier this year, CA Inc. has acquired Nimsoft AS, 3Tera Inc. and Oblicore Inc.

CA Inc.’s revenues increased 5.0% year over year to $1.09 billion in the first quarter of fiscal 2011. The company performed well in most of its business segments and across all geographical regions. We expect CA to be one of the key beneficiaries in an improving IT spending environment.

However, we are slightly concerned about the intense competition in the software and cloud computing space from big players such as International Business Machines Inc. (IBM - Analyst Report), Hewlett-Packard & Co. (HPQ - Analyst Report) and Dell Inc. (DELL - Analyst Report). We expect CA Inc. to continue to invest in its products and solutions in order to secure its leadership in key markets such as Mainframe, Service Assurance, Identity Access Management, virtualization and cloud computing.

We currently have a short-term Hold rating (Zacks #3 Rank) on CA Inc.

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