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January 8, 2002

Orchestrating a Torrent

Its recent acquisition of Torrent Systems will take Ascential Software into the high-end market for ultra-scalable data integration.

by by Philip Russom

Late in November 2001, Ascential Software Corp. of Westboro, Mass. acquired privately held Torrent Systems Inc. of Cambridge, Mass. for $46 million in cash. Both companies have leading tools and platforms for data integration in support of data warehousing and business intelligence.

This acquisition is very interesting, so let's look at it in detail from the viewpoints of both Torrent and Ascential.

The View from Torrent

Torrent Financials. By most outward signs, Torrent was doing rather well as a business in 2001. Torrent received a $12 million round of additional financing, opened four new offices, hired new employees up and down the organizational chart, and won a few new customers. These events are not signs of a company in need of an exit strategy. So why did Torrent's investors and management sell to Ascential?

Many investment firms are divesting their portfolios of small technology companies, because most of these are high-risk investments right now. With IT spending in free fall (made even more unpredictable in the wake of September 11th), prospects are not promising for a return on investments made in small software firms. So, when an opportunity arises for recouping an investment, investors are quick to sell small companies they supported in the recent past. That's just how it is in today's economy.

In that context, the sale of Torrent to Ascential makes a lot of sense. As a private company, Torrent doesn't disclose its financials, but I'm guessing that the $46 million price tag approaches ten times annual revenue, at a time when many good software companies are going for just twice revenue. And Torrent owners were paid in cash, not in Ascential shares. Torrent's owners will pay out a couple of million in professional fees and severance costs, but still walk away with a wad of cash that's quite large for the current economy.

Torrent Management. Torrent management claims a commitment to staying with Ascential, where they've already embarked on new roles. In fact, they are already pushing ahead with initiatives that smaller Torrent couldn't support. For instance, now backed by the Ascential name (which is a larger and more established company than Torrent), they are able to immediately gain entrance to corporate prospects and potential software vendor partners.

Torrent Technology. Torrent Orchestrate is, in essence, a batch-processing platform on steroids. The steroids take the form of heavily parallelized functions that leverage massively parallel hardware. Note that a batch process now can run every second, instead of every night as it did 10 years ago. Yet, a multi-megabyte file is processed in every batch because that's the volume of data that Internet and e-business environments generate. Orchestrate can also parallelize functions of enterprise applications that run on top of it. Certified applications include Ascential DataStage and FirstLogic Data Information Suite.

Torrent Competition. The only way to scale up to the highest extremes of data integration is to rely on heavily parallelized software running on massively parallel systems. (For a detailed study of the technology requirements, see my article "Mass Movement".) Torrent Orchestrate satisfies this key technology requirement in spades, as does the closest competing product, Co>Operating System from Ab Initio Software Corp. Recent releases of Informatica PowerCenter, the Sagent Solution, and other data integration platforms have newly rewritten functions to make them parallelized. But Orchestrate and Co>Operating System are the only two designed to be massively parallel "ab initio" (Latin for "from the beginning").

Ab Initio management is infamous for its unique belief that it needs no marketing to expand market share, so it has severely limited its communications with markets, press, and analysts. Promoted via Ascential's well-oiled marketing and sales machine, Orchestrate suddenly has a significant competitive advantage.

The View from Ascential

Ascential Financials. Although Ascential management predicts they still won't reach profitability until late 2002, Ascential does have an enormous cash reserve, resulting from IBM's buyout of Informix's database products and services. With the costs of that acquisition, plus an ongoing stock buyback campaign, the cash reserve will shrink. But it should still amount to well more than a half-billion dollars, which is huge for a software company in today's economy.

On a second front, now is a great time — if you have the cash — to acquire software companies at bargain basement prices. For example, DataMirror (a data integration firm in Markham, Ontario) picked up four other vendors in a little more than 12 months, and now has a greatly expanded offering that encompasses just about every kind of integration technology. This is a good example of the ongoing and pervasive consolidation that markets for integration products and services have been witnessing for three years or so. (I examined this trend toward consolidation in the article "Beneath the Waterline".)

On a third front, let's recall that Ascential is the product of a long history of mergers and acquisitions (MnAs), as it morphed from VMARK to Ardent to Informix to Ascential. There were problems here and there during this history, but — in the long run — it's been a successful strategy for growth based on MnAs and spin-offs. If you put these three fronts together, you can see that Ascential's cash reserves and experience with MnAs, combined with market conditions conducive to acquisitions, put Ascential in a position to gain considerably. In this context, acquiring Torrent makes sense, and we should expect Ascential to acquire more similar-but-complementary software vendors, as it repeats the success of its MnA past.

Ascential Management. At the corporate level, I predict a smooth folding of Torrent into Ascential because Ascential management (and the majority of its employees, in fact) come from Ardent and Informix, and all have extensive experience with successful MnAs. Furthermore, both companies have headquarters in eastern Massachusetts and both recently went through a project that certified DataStage to run on Orchestrate. There's much in common that should help the merger complete smoothly.

Ascential Technology. Ascential has stated a commitment to integrate Orchestrate's parallel processing capabilities directly into the DataStageXE platform. Folding source code together like this will take almost a year. But it's well worth the effort, because DataStage — which is already common in mid-to-large data warehouse projects — will be able to tackle the highest edge of the market where multi-terabyte data warehouses reign.

Once the integration is complete, the putative technological advantage of DataStage will be more than most customers need. However, the few customers and prospects that need the extremes of data integration scalability (largely in the Fortune 500) will pay top dollar with a wide margin. So it's worth entering this high-end market niche. Note that, as data volumes continue to increase, the market for high-end data integration will soon broaden from the Fortune 500 to the 1000 to the Global 2000, and so forth, so this market is both profitable and growing.

Ascential Competition. The competitor that stands to lose the most from Ascential's acquisition of Torrent is Ab Initio. Users tell me that Co>Operating System is a great product. But, based on my experience with other products, IT departments won't pay a bazillion bucks for a product that they've never heard of. Even when IT is sold, they can't sell a no-name product from a tiny company to their management, at least, not in this extreme high-price range. With the Ascential name behind it, Orchestrate should witness increased adoption in 2002 in the high-end market it targets.

Torrent brings to Ascential a customer base that's small in number, yet each company is extremely large with strong brand recognition. Because Torrent and Ascential's customers are largely complementary, there is great potential for cross-selling. And the newly expanded product offering of DataStage will make it appealing to an even broader range of prospects, which might help it compete more effectively against Informatica PowerCenter, its leading competitor in generic data warehouse situations.

With these points in mind, you should expect Ascential's customer base and annual revenue to pick up by the end of 2002. This will tilt the balance of power in the data integration space. (I can easily imagine industry analysts redrawing the pie charts that represent the market shares of data integration vendors!) Ascential has the potential to emerge with a noticeably fatter slice of the pie.

Assessment

The data integration product lines from Torrent and Ascential are complementary, because their target markets and enabling technologies differ. The monopolistic-yet-complementary nature of the acquisition positions Ascential management to make good on its promises to incorporate most of Torrent's employees into its operations, as well as to integrate the parallel processing technology of Torrent Orchestrate into the Ascential DataStage product line. Assuming that Ascential management executes these two actions well, the IT market will see by the end of 2002 a profitable and much larger Ascential, with a greatly expanded product line and customer base.

Philip Russom, Ph.D. [www.philiprussom.com] is an independent industry analyst and consultant based in Waltham, Mass.

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