Update: Autonomy scoops up Verity for $500m

Enterprise search firm Autonomy has announced it will acquire competitor Verity for approximately $500m.

The deal joins two leaders in the market for software to manage corporate data, which has recently seen increasing competition from web search giant Google.

Autonomy CEO Mike Lynch said in a conference call with reporters: "This is an acquisition that is expected to create a strong undisputed global leader in the unstructured information management market."

He added: "This opens up a whole series of cross-selling opportunities across 16,000 combined customers."

Autonomy's customers include Astra Zeneca, BBC, British Aerospace, Nokia, Shell and Vodafone.

Cambridge-based Autonomy is paying a premium for California-based Verity - 30 per cent above yesterday's closing share price - but analysts say it could be worth it for the revenue boost. Autonomy says it expect to see earnings double in the first year as a combined company.

Autonomy raised about half of the sale price - £153m - through a rights issue and says after the deal (which is expected to close later this year) it will have a cash balance of at least $65m.

Industry watchers agree the deal makes sense strategically. The two companies have complementary technologies with minimal product overlap and Verity should help expand Autonomy's reach in the US. But it's also a case where bigger may simply be better.

David Mitchell, practice leader for analysts Software@Ovum, called the deal a "necessary move" as mid-sized companies "suffer the most" in today's IT landscape.

It's the large companies, he told silicon.com, with the best profitability and growth. The combined Autonomy-Verity will be a business with "the scale to invest in R&D and innovation".

As competitors such as Google already have the capital to be formidable foes in the search market, "a key defence is to acquire scale yourself", he said.

Jon Collins, principal analyst at Quocirca, even speculated that further consolidation could be in store in this arena. "I wouldn't be at all surprised if the combined company is acquired by a larger beast over the next year," he told silicon.com. "Enterprise companies are looking to reduce the number of suppliers they work with, so any smaller company addressing the enterprise market is increasingly feeling the squeeze."

The merger of two software companies always causes "unquiet" for customers, said Ovum's Mitchell, so one of immediate challenges for Autonomy-Verity will be to create a new product roadmap to explain to customers which products will continue to exist, which will be fazed out and when to expect these changes.

Joining up the firms' operations will also be a test of the acquisition's success but one which analysts believe Autonomy should be up for. Autonomy said some jobs may be lost in the integration process but did not expand on any particulars.

Lynch will remain CEO of Autonomy and Verity CEO Anthony Betancourt Betancourt will become CEO of Autonomy's US division, called Autonomy Inc.

Reuters contributed to this report