Intelligent Enterprise

The Lexalytics-Infonic merger announced last week creates a company, focused on sentiment analysis, that is poised to compete with larger, established text-technologies vendors. The companies' market presence hasn't been huge — Infonic's text-analytics division booked £600 thousand (about $1.2 million) in 2007 sales, and Lexalytics, a rapidly growing US start-up, earned $1.5 million in 2007 — but the combined company should be worth more than the sum of the parts. Whether it will be worth enough to justify a $40 million valuation of the deal, which exceeds Infonic's $23 million market capitalization, remains to be seen.

Lexalytics' Marketing VP Christine Sierra posted in a blog article that the text analytics businesses of her company and Infonics will be combined in a UK company that will be called Lexalytics Limited. "The rationale behind combining the businesses is to pool the expertise and complementary products of the parties in this specialist area and to drive joint growth in sales, utilizing Infonics global sales capabilities." CEO Jeff Catlin, who will head the combined operation, told me that he and colleagues have not yet completely determined integration points; initially, the combined set of data files, which for instance capture part-of-speech patterns that are used to disambiguate phrases in various application domains, should be useful in boosting accuracy of the current tools. Lexalytics' application focus has been Voice of the Customer and corporate reputation management while Infonic has focused on analyzing and classifying according to sentiment in financial sources. Both companies have significant publishing customers.

Jeff told me that Lexalytics has been on track to double revenue to $3 million in 2008. Earlier this year, the company had been seeking $3 million to $5 million in equity investment to support its growth.

Infonic was founded and formerly known as Corpora Software. A number of product-line components have apparently been shelved since I first talked to the company in 2004: the Find enterprise search tool and Connect knowledge-management technology and perhaps also a document viewer, Jump, and the Summarize tool. From the looks of Infonic's product line, it seems Burst for clustering and classification would have been incorporated into other products. Jeff Catlin confirmed that a number of past Corpora products are on the shelf. Some may be revived although likely not the search tools.

Infonic's other divisions cover document-management and Sharepoint replication. These divisions generated 93% of 2007 sales according to the company's 2007 annual report. The company is publicly traded on the Alternative Investment Market (AIM), a sub-market of the London Stock Exchange. The company has 270,592,853 shares outstanding. At today's (August 6) closing price of 4.375 pence, Infonic's market capitalization is £11.8 million, about $23.1 million.

Stock market investors take into account all public information when deciding how much they are willing to pay for shares. Investors know about the merger. They know about and have accounted for Infonic's publicly disclosed anticipated revenue, including revenue that will flow to Infonic from a valuable contract with Thomson-Reuters, and Lexalytics' anticipated revenue.

It was a Lexalytics press release that claimed a $40 million valuation for the merger. The release on Infonic's Web site did not list that valuation, but it apparently originated with Infonic. Jeff Catlin referred me to Infonic CEO Mark Thomson, who told me in a phone conversation that the $40 million merger valuation was calculated as a multiple of anticipated revenue. Thomson believes Infonic as a whole is worth $100 million despite a market capitalization of a quarter of that figure. He told me, "The valuation on AIM, so far as I'm concerned, means nothing." Thomson referred me to investment banker Paul Cornelius at FinnCap. JMFinn Capital Markets last December assisted Infonic with a £3.1 million share placement, with "market capitalization at the Placing Price [of] £14.7 million," currently about $28.6 million. Since December, post announcement of the Lexalytics merger but in a down market, Infonic's market capitalization has decreased by over $5 million.

When private companies go public or sell shares to venture investors, they do calculate share price based on anticipated revenue among several factors. And when a publicly traded company is a takeover target, the buyer typically offers a premium over the current trading price. For example, IBM's 10 Euro tender offer for ILog was at a 37% premium over the then-current share price. I have never heard of a 4x valuation multiple, however, and Paul Cornelius of FinnCap did not return my phone calls seeking clarification.

I've spent far more space on valuation questions than I would have preferred. My justification is that they shed light on start-up concerns, namely the need for financial resources to fuel growth, market workings. Whatever the true valuation, the new entity should be better positioned to compete with text-analytics rivals, to deliver more accurate sentiment analysis capabilities to a broader set of users.