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Borland Tools: No Sale


Will spin-off of IDEs into CodeGear subsidiary have legs?

By Jennifer deJong
December 1, 2006 — 
Nine months after it put its IDE business up for sale, Borland has done an about-face.

In its third-quarter earnings call last month, the company announced that it will retain ownership of its developer tools group, reversing its earlier decision to seek a buyer. The developer tools group, which includes the company’s Java, C++, C# and Delphi IDEs, will operate as a wholly owned subsidiary of Borland Software, under the name CodeGear.

“After much consideration, we made the decision to establish CodeGear as a separate subsidiary,” Borland president and CEO Tod Nielsen said in a statement. “We have always stated our intention to find the right buyer for this business….After a lengthy due diligence process with several serious bidders, we feel the CodeGear decision is in the best interests of our customers, shareholders and employees,” the statement said.

Asked why Borland reversed course, the company’s chief marketing officer, Rick Jackson, said in a phone interview with SD Times: “Valuation and price had something to do with it. This was not a fire sale.” According to Jackson, Borland had lined up five potential buyers, including “several private equity firms and a couple of strategic companies.” He declined to offer details about the interested parties but said it was difficult to establish an appropriate value for the tools business. “The financials of Borland’s ALM business were so intertwined with those of [the developer tools group] that operational expenses were hard to break out.”

Voke analyst Theresa Lanowitz said it’s difficult to know exactly what went down with potential buyers. “There may have been source code issues, revenue issues, intellectual property issues,” she said. “But the whole reporting of events would have been a lot cleaner if they had not announced [the plan to sell] in February, and then dragged out [the process] until November.”

Lanowitz, who worked for Borland earlier in her career, isn’t convinced the decision to spin off the IDE business will work. “The IDE business today is commoditized,” she said. “It comes down to Eclipse and Microsoft Visual Studio,” she said. “It doesn’t make sense to operate a wholly owned subsidiary in a commoditized market.”

IDE DOWN, ALM UP
According to Borland’s own numbers, the market for its IDEs is declining. For the third quarter ending Sept. 30, 2006, revenues for the IDE business reached US$15 million, compared with $24.4 million for the first quarter of 2006. The company reported an overall net loss of $12.2 million for the third quarter of 2006, but one bright spot was the growth of Borland’s application life-cycle management business. ALM revenue for the third quarter of 2006 reached $54.7 million, up 91 percent over the third quarter of 2005.

“That is something Borland can be proud of,” said Ovum analyst Bola Rotibi. The figures are certainly impressive, she said. “But they don’t reflect the growth of Borland’s ALM platform.” They represent sales of point products that fall under the ALM umbrella, such as Caliber (for requirements) Together (for modeling), Tempo (IT governance), Silk and Gauntlet (for testing), she said, noting that Borland’s ALM competitors measure revenue the same way.

Rotibi said she was shocked how far revenues for Borland’s IDEs had dropped, but she believes there is an opportunity for CodeGear. “People are writing code; they are creating composite applications,” she said. “Eclipse has gained popularity. But the need for good tools is still there.”

Borland acknowledged that it doesn’t see growth for older IDEs, such as Delphi. But Ben Smith, who worked with the developer tools group for 12 months before assuming his new role as CodeGear CEO in November, sees new revenue opportunities in JBuilder 2007. “I don’t see JBuilder collapsing under Eclipse. I see opportunities to build a business on JBuilder Eclipse,” he said of the company’s Java IDE. JBuilder 2007 now is built on Eclipse, instead of Borland’s older, PrimeTime framework. And it provides features that make it easier for developers to manage open-source tools, such as Subversion and Bugzilla, within JBuilder, he said.

Smith noted that CodeGear will have a separate brand, management team, research and development organization, sales and marketing strategy and global operating infrastructure. He also said the Borland subsidiary will begin reporting sales and earnings numbers early next year.

CodeGear must move quickly to prove it has a business worth saving, and Borland needs to prove it is a viable ALM player, said Rotibi. “Going forward, we are going to want to see a return to profit in 2007. There can be no excuses.”


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