Will IBM, Microsoft, or HP Buy This Falling Cloud?

Source: Thinkstock

Source: Thinkstock

The business landscape continues to evolve as the Internet of Things merges cyberspace with the physical world. In recent years, cloud-based services have formed a competitive environment among the biggest tech firms in the market. Staying relevant is no easy task and time is of the essence. As this technological shift takes place, smaller firms like Rally Software (NYSE:RALY) could become takeover targets.

Software vendors are battling for revenue dollars around the world. According to recent data from Gartner, global software revenue totaled $407.3 billion in 2013, up 4.8 percent from a year earlier. Microsoft (NASDAQ:MSFT) remained the leader with its software revenue jumping 6 percent to $65.7 billion, while Oracle (NASDAQ:ORCL) overtook International Business Machines (NYSE:IBM) for second place with $29.6 billion, compared to IBM’s $29.1 billion.

“Investors continue to focus on revenue growth and market share gains as the primary criteria when evaluating vendors,” said John Rizzuto, research vice president at Gartner, in a press release. “At this point, the new and emerging technology markets in software, such as digital marketing and public cloud computing, are so nascent that investors are favoring those companies that are early and aggressive in grabbing both market and mind share — in many cases dismissing progress on earnings and cash flow in hopes that they will one day follow.”

For the first time in history, a pure cloud vendor cracked the top ten — Salesforce.com (NYSE:CRM). The company’s software revenue surged 33.3 percent to $3.8 billion in 2013 compared to $2.9 billion in 2012. If older tech names such as Microsoft and IBM are going to keep their momentum, investors can expect to see a growing focus on the cloud. Hewlett-Packard (NYSE:HPQ), which posted the worst sales contraction among the top ten vendors, also needs to address growth issues. If growth can’t be produced organically, more buyouts will likely take place.

Rally Software could be a potential buyout target. Founded in 2001, Rally Software is a leading global provider of cloud-based solutions for managing Agile software development. It is focused on making firms faster, leaner, and more agile. In other words, Rally helps other companies save money on projects. More than 9,700 firms and 112,000 users across 101 countries use Rally. Well-known clients include Fidelity, Raytheon, Sony Ericsson, NBC Universal, and Yahoo.

The company reported a loss for the most recent quarter, but revenue jumped 27 percent from the prior quarter to $19.6 million. Revenue for the entire year reached $74.3 million, up 31 percent from the previous year. Cash flow used in operations in the fourth quarter was $7.9 million and cash flow used in operations in fiscal year 2014 was $18.5 million. Cash and cash equivalents at January 31, 2014, excluding restricted cash, totaled $88.9 million.

Aside from the financials, Rally has a growing reputation of being best in class. In September, the company was named to “Best for the World” list of companies with the most positive overall social and environmental impact for the second consecutive year. It was also honored as “Best for Workers” for creating the most positive impact for their workforce. In November, Rally ranked No. 182 on Deloitte’s Technology Fast 500, a ranking of the 500 fastest growing technology, media, telecommunications, life sciences, and clean technology companies in North America. Most recently, Rally’s CEO Tim Miller was named CEO of the Year by ColoradoBiz magazine. Miller joined Rally as CEO in 2003 and has steered the company to its current position as a Forrester-recognized leader in both Application Lifecycle Management (ALM) and in Project Portfolio Management (PPM) as well as a Magic Quadrant leader by Gartner.

Perhaps one of the biggest appeals of Rally from a buyout standpoint is its stock price, which is reaching new lows on a daily basis. Shares went public in April 2013 at $14 each and peaked at $33 in September. Since then, shares have fallen off a cliff and are now below their initial public offering price. Over the past six months, shares are down more than 50 percent.

As Baron Rothschild once said, “The time to buy is when there’s blood in the streets.” Investors looking to add a highly speculative position to their portfolios should keep Rally on their radars. At some point the falling knife will be caught, and it could be by the hands of a buyout.

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