When Wincap landed in the lap of one-time rival, Cyrano Software, for a mere $3m earlier in the year, the acquisition looked more like the closing scene in a courtroom drama than a hard-fought business negotiation. Wincap’s history encapsulated all the elements of a successful celluloid melodrama: police raids, court room battles and alleged suspect corporate dealings behind closed boardroom doors.
The drama took shape in the spring of last year. Then Wincap was a fast-growing French application development tools vendor with revenues up 56% to $16m in 1998 and a customer base of 450 Global 2000 companies and had adopted an aggressive hiring policy to swell its ranks of software developers. One of its first ports of call was the group of software engineers that had been laid off when fellow French rival, Diagonal, went bankrupt some six months earlier. Wincap hired 17 ex-Diagonal developers.
And then the action really stepped up a pace. Diagonal’s founder, Andre Karchoud, claimed that an ex-Diagonal engineer still had the source code from his company’s D2K mainframe application development tool stored on a PC he had moved to Wincap. He also suggested that Wincap planned to use the code in its own WorkBench product and, therefore, was illegally capitalizing on his own company’s demise. The accusations eventually led to gendarmes swarming over Wincap’s Paris-based headquarters looking for the PC in question. When the evidence was discovered, the French justice department duly launched an investigation to determine whether Wincap had indeed been trying to misappropriate the Diagonal code.
On December 15 1998, the court’s conclusions were made public. There were no two single identical lines of code in D2K and WorkBench 5.0 – just as Wincap had maintained all along. The incident was put down to bad blood, with Karchoud still smarting from an unsuccessful attempt to sell Diagonal to Wincap in June 1997.
Even though its reputation had been salvaged, Wincap itself was also sliding slowly into bankruptcy. By the end of the year the company’s sales had almost come to a standstill and investors were getting edgy and wanted out. Wincap finally also moved into liquidation and the fate of the company was transferred out of the hands of its executive board into the hands of the French justice department. It took the customary step of asking Wincap employees to choose from a list of five new parents: Cyrano, Alan Systems Group, ISG, Emendo and Technology Group. Cyrano won out. Wincap employees were already familiar with Cyrano, having worked closely with it to build an interface between Wincap WorkBench and its own mainframe testing tool, Cyrano Test.
WorkBench bolsters Cyrano’s position in the mainframe application development tools market. It gives it the opportunity to offer a documentation tool that enables applications to be regressively tested for compatibility with any new software in development. Legacy application tools are still Cyrano’s primary market. Of the company’s $29.6m in revenues for fiscal 1998, 40% came from Cyrano Test, its Y2K testing tool and the addition of Wincap should increase this figure to 50%, according to Phillipe Eyries, CIO at Cyrano.
Legacy application development revenues will continue to run at 50% for the next three years, says Eyries. However, as the primary driver in this market – Y2K conversion projects – ceases to become an issue, the company’s mainframe testing revenues will inevitably stagnate. It is a problem that Cyrano is aware of and is trying to address. It is the reason why it went out and bought Fidgi, a small French e-commerce application testing start-up this month for $996,000 to kick-start its somewhat ambitious plans in e-commerce development tools. In the last three months we have seen our e-commerce related business [Cyrano Web Tester and Cyrano Web Suite] rise from 2% to 10% and we plan to increase it to 30% by the end of the year 2000, says Eyries.
We have now become very focused on providing products to test the availability and security of e-commerce platforms which is a market in which none of our competitors play. Our traditional competitors in testing tools such as CompuWare and Mecury Interactive don’t have security tools. The companies we will now come up against such as ISS and Axent in security tools don’t offer testing products. The Fidgi acquisition speeds up our ability to offer both, says Eyries. By June 1999 Cyrano will have made its first play in this space with a firewall testing and defect tracking product for e-commerce applications.
This most recent acquisition was clearly made to increase Cyrano’s penetration into new markets. Wincap was merely an opportunistic purchase that served to consolidate its position in mainframe testing tools, where it was feeling the pressure from competition from Mercury Interactive, CompuWare, Rational Software and Segue. Mercury is by far the biggest player in the testing market with a 40% share. We have only about a 10% stake, admits Eyries. The software testing tools market was valued at $360m in 1998 and is predicted to hit $1bn by 2000, according to IDC.
However, concerns still linger over whether Cyrano’s acquisition is too little, too late. Wincap is one of three small acquisitions Cyrano – itself a product of a merger between IMM and Performance Software in 1996 – has made in the last 18 months. In October 1998, the French development tools company went out and bought The Software Laboratory for the equivalent of $1.2m, which it now runs as a test center subsidiary. Then, came the purchase of Wincap which was closely followed by Fidgi. They still have to figure out a way of being something more than a Y2K company. Although the company is trying to build a broad-based legacy application toolkit through acquisition, it’s a flat market, says Scott Lundstrom at AMR Research.
Other analysts have also poured cold water over Cyrano’s e-commerce application development tools vision. Cyrano ought to think of itself as highly exposed to the competition, particularly to Segue, which is trying to move into Europe. The company seems to be financially sound, but its web products are, to put it bluntly, not very good – certainly not as good as Segue. And with Mercury Interactive coming up from behind they are not in the strongest of positions, says Bruno Beloff, a ComputerWire analyst and a tools market specialist.
Acquisitions aside, Cyrano is also trying to establish an indirect channel in a bid to expand its business beyond its core market in Europe to US and Asia. The company has now built up an impressive list of partners including Compaq, Sybase, Oracle, IBM, HP, Sun and Digital in addition to a number of systems integrators and has a total of 20 resellers. We’ve been working very hard for the last two years to build a channel and expect it to yield 35% of our revenues by the end of 2000, compared with 15% at the moment, says Eyries.
Cyrano still derives 60% of its revenues from Europe but is planning an even distribution between US and non-US by the end of next year. This month, the company also signed agreements with with three European distributors for the Cyrano Wincap product. The distributors are SSH Products in the UK, Management Software Benelux in Holland, Belgium, and Luxembourg, and Seleste Gestione Centri Spa in Italy. The company anticipates revenues of $10m by 2000.
Its inability to get itself listed on Nasdaq may thwart any plans for US expansion, however. Cyrano tried for a US public listing two years ago but investors were deterred by earlier failures from European software companies and were also put off by Wincap’s legal wrangles which had just begin to surface. Cyrano is well aware of the issue. Visibility is a problem for us, unlike our four main competitors we are not listed on Nasdaq and that’s a definite handicap for any European software company, says Eyries.
A Nasdaq listing has not disappeared from Cyrano’s agenda but the company believes it will have to prove that it has successfully digested former acquisitions by producing four straight profitable quarters, before it looks for a US filing. And that won’t happen until the May-June 2000 timeframe. There is a Plan B, however. If the company is willing to forego its independence and Cyrano was bought by a Nasdaq-listed company. But time is running out and the company needs to decide on the way forward before its relatively strong financial position evaporates. Cyrano closed 1998 with $29m in revenues and $19m in cash.
