Smaller Firms Buy Overseas Shops

By Kim Hart
Washington Post Staff Writer
Monday, September 18, 2006

When WebMethods Inc. looked at tiny California technology firm Infravio Inc. as an acquisition candidate, the Fairfax company knew that Infravio's product would be a perfect fit for its software suite. But the real head-turner about the 65-person start-up was the location of its employees: 50 software developers in Chennai, India.

Analysts consider the $38 million WebMethods paid to be a premium price for a small company that made less than $1 million last year. In the long run, though, the purchase plays into the cost-cutting strategy WebMethods has adopted after four years of falling stock prices, roller-coaster revenue and accounting problems.

Two years ago, WebMethods opened its 58-person India Development Center in Bangalore, and chopped millions of dollars from its budget as a result. The Infravio purchase nearly doubles the company's presence in India.

While large technology companies have been moving research and development resources overseas for nearly a decade, such outsourcing has also become important for small and mid-size software firms.

"Like a lot of software companies, WebMethods is trying to rationalize its costs by having as much research and development offshore as they possibly can," said Irit Elrad-Jakoby, an analyst that follows the company for Next Generation Equity Research LLC in Chicago.

WebMethods, which has 840 employees around the world, makes software that lets different applications in a computer system work together.

Since opening its Bangalore center in 2004, WebMethods saved $5 million in research and development expenses, which totaled $40.2 million for the year ended March 31, according to the company's annual report. The decrease, the company said, "was primarily the result of increasing the proportion of our product development staff in Bangalore, which has lower personnel and operating expenses than our product development centers in the United States."

Analysts said WebMethods, which reported a $5.8 million loss in its first quarter ended June 30, will most likely expand its staff in India. After going public in 2000, the company's stock price has been steadily dropping from a peak of around $100 in 2001. WebMethods closed Friday at $8.17, down 13 cents.

Ten WebMethods executives have resigned in the past two years, and the company restated its 2004 financial earnings after discovering accounting errors by employees in its Japanese subsidiary.

Mark L. Wabschall, WebMethods' chief financial officer who will leave the company at year-end, said he expects the acquisition to lower earnings in the next three months before turning out a profit by the end of March.

Infravio's presence in India "is a sweetener for this deal, and not a trivial one," said Gregg Moskowitz, an analyst with the Susquehanna Financial Group.

"The bar to make this an accretive transaction is much lower due to Infravio's low cost structure."

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