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March 19, 2002

Data Quality Week

Ascential Software's announcement to acquire data-quality tool vendor Vality Technology momentarily puts data quality in the limelight

by Philip Russom

The week of March 11th was supposed to be a quiet one. Then suddenly on the morning of March 12, 2002, Ascential Software Corp. of Westboro, Mass. announced its intentions to acquire privately held Vality Technology Inc. of Boston, Mass. for approximately $92 million in cash. It ended up being "Data Quality Week" (as I call it) with lots of people across the software industry debating the importance of data quality and its relationship to data integration. Here follows many of the comments and arguments I heard throughout the week, as well as my own.

The Essential Ascent of Ascential

"Our goal is to create a comprehensive platform for data integration and related functions like data quality," said Jeff Boehm, executive director of product marketing at Ascential. He is, of course, referring to Ascential's DataStage XE, a leading platform for extract, transform, and load (ETL). Ascential hopes to broaden DataStage to address general data integration issues across the entire enterprise, instead of just ETL, which is mostly confined to data warehousing applications.

Ascential Software has a long history of successful mergers and acquisitions (M&As), going back to its days as Ardent Software. (Many of these are summarized in my analyst update Orchestrating a Torrent.). This recent purchase is most likely another smooth M&A for Ascential's experienced management team. And that's important, because M&As are essential to Ascential's ascent as a firm, enabling both the strategy for broadening DataStage and for growing revenue.

"We like the acquisition," said Mike Schiff, vice president of e-business and business intelligence at market-research firm Current Analysis. "This acquisition makes sense because Ascential is sticking to its core competency of data integration infrastructure and because data quality issues regularly go hand-in-hand with data integration."

Competitors' Comments

I touched base with a few executives in the vendor community for data-quality tools. Unanimously, they were all happy to bask for a moment in the limelight shone on their community by Ascential and Vality.

"It was inevitable that a firm of Ascential's stature would acquire a data-quality product," said Len Dubois, vice president of marketing at Trillium Software. "We like it, because it brings a lot of attention to the data-quality space." In a rare moment of solidarity, Dubois' counterparts at FirstLogic Inc. and Group 1 Software agreed.

Integrating the Integration Platform

With any acquisition in the software industry, the task of integrating the two companies' products is an issue — in this case Ascential's DataStage and Vality's Integrity. According to Steve Brown, vice president of product strategy at Vality: "Ascential and Vality have already pulled the two products together. You can embed Integrity processes in a DataStage job, where data quality is just another step in the ETL process."

"That said, however, we also have to keep DataStage open," added Ascential's Boehm. "We understand that some of our customers want to use our DataStage data integration platform with data-quality solutions from other vendors."

Changing Partners

Ascential has a business and technology relationship with competing data-quality vendor FirstLogic, a relationship brought in via the Torrent acquisition. Interestingly enough, Vality has a relationship with Informatica Corp., Ascential's most commonly encountered competitor. I suspect that these relationships will dissolve fairly quickly, and that data-quality vendors FirstLogic, Group 1, and Trillium will seek to strengthen their relationships with Informatica and other integration providers. These business relationships are important because they provide channels for both partners.

The Price is Right?

Everyone I spoke to commented on the high price Ascential is paying for Vality. "We believe Vality makes a nice technology fit with Ascential's DataStage integration platform," said financial analyst Mark Murphy in a report from First Albany Corp. "However, at 4.4 times Vality's 2001 revenue stream of $21 million, the price paid is too generous, in our view. This represents nearly twice the enterprise value/sales multiple that Ascential trades at (2.5x), and twice what our 30-company software comparison group trades at (2.2x)."

Yet, other financial details of the deal seem to be in order. "We are forecasting no impact to Ascential's earnings this quarter," reported Rob Tholemeier of Wells Fargo Securities LLC. "For the rest of the year, we forecast revenues to increase to $142.7 million. On an earnings basis, we are lowering Q2 earnings by $0.01 to show initial integration impacts, but, as the company moves through the year, costs should come back down, and we are only slightly adjusting EPS for the total year."

In the conference call announcing the acquisition, Ascential's President and CEO Peter Gyenes repeated his commitment to leading Ascential into the black: "We remain on track to achieve profitability during the fourth quarter of 2002."

Evaluating the Evaluation

The day of Ascential's announcement, four privately held, VC-funded software firms in eastern Mass. contacted me. All asked the same question: "How do we cash out with a high evaluation the way Vality did?" (By the way, I got the same question from a different list of vendors when Ascential acquired Torrent.) The answer, of course, is to be acquired by Ascential.

The high valuation of Vality helps raise the valuation of the major players in the data quality market," said Tim Waggoner, the CTO at Group 1 Software. As a point of perspective, note that Group 1 purchased HotData.com (a hosted application for name and address scrubbing) a year ago for a mere $2 million, despite a substantially greater venture capital investment in the company. HotData has demonstrated a return by increasing Group 1's prominence in the emerging middle market for real-time data cleansing.

Assessment — The Need for High-Quality Data

According to Mike Schiff at Current Analysis: "The classic garbage-in garbage-out problem affects many applications." In other words, the cleanliness and completeness of data influence the effectiveness of many types of applications. This is especially true of applications for customer relationship management (CRM). As many corporations realized the importance of clean customer data in the late '90s, all data-quality vendors adjusted their offerings to support various types of CRM initiatives. In fact, I believe that customer data — due to its growing importance and demonstrable ROI — is poised to surpass names/addresses as the sweet spot of the data-quality market.

CRM aside, a recent report called "Data Quality and the Bottom Line" by Wayne Eckerson of The Data Warehousing Institute estimates that "data-quality problems cost U.S. businesses more than $600 billion a year." The same report reveals that 65 percent of companies break even or gain ROI in data-quality solutions. These two facts combined suggest to me that data-quality initiatives stand a good chance of binding many of the wounds from which revenues bleed. With that in mind, let's hope that "Data Quality Week" — spawned by Ascential's announcement to acquire Vality — has helped more corporate leaders understand the need for high-quality data.

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