Keynote Systems, Inc. (KEYN): Should You Follow the Big Money Into the Web Analytics Biz?

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Keynote Systems, Inc. (NASDAQ:KEYN)As businesses, both large and small, move their operations online, they are looking to software companies for the ability to track user experiences and gain an advantage over the competition. Specialists like Keynote Systems, Inc. (NASDAQ:KEYN) and Compuware Corporation (NASDAQ:CPWR)’s Gomez unit have built their businesses around ensuring that companies’ websites are delivering value at a continuously high performance level. As growth rates in the sector decline, private equity sees an opening, with investment firm Thoma Brava recently offering to acquire Keynote for roughly $395 million. So, should investors follow its lead?

What’s the value?

Keynote Systems, Inc. (NASDAQ:KEYN) runs one of the world’s largest quality control networks for commercial websites, with 300 monitoring locations in 180 countries. It has also been focusing on the large enterprise market due to the proliferation of mobile devices and the increasing need to manage website performance across operating systems. With large companies looking to outsource to a limited number of globally connected suppliers, Keynote improved its product offerings by acquiring mobile specialist Mobile Complete in 2011.

In FY2013, Keynote Systems, Inc. (NASDAQ:KEYN) has generated relatively weak financial results, with decreases in revenues and adjusted operating income of 0.7% and 10.8%, respectively, versus the prior-year period. Despite signing up a rising number of customers to its website monitoring platform, the company’s top-line growth was hurt by declines in its mobile business, especially in the European region. In addition, Keynote’s operating profitability was negatively impacted by rising tech development costs as it competes with larger competitors for skilled labor. While Thoma Brava’s acquisition price was expensive, at roughly 17 times trailing adjusted EBITDA, the investment firm should be able to create operating efficiencies with its control position.

Finding another story

Meanwhile, industry competitor Compuware Corporation (NASDAQ:CPWR) has also been an acquisition target lately, with large stakeholder Elliott Associates offering to buy the company in January 2013. The company has a leading position in the web analytics business through its Gomez and dynaTrace units, which manage a hosted network across 33 countries. However, Compuware has been plagued by declining sales and profit for a number of years, as customer purchases of its mainframe software and maintenance products continue to dwindle.

In its latest fiscal year, Compuware Corporation (NASDAQ:CPWR) reported poor financial results, with declines in revenues and adjusted operating income of 6.5% and 28.4%, respectively, compared to the prior year. The company’s operating income was hurt by double-digit sales declines in its mainframe unit, the source of most of its profit, as well as higher compensation and development costs. On the upside, Compuware’s web analytics unit generated higher sales, up 11% for the period, and is the company’s likely future growth engine. Despite attempts to shake Elliott with an upcoming initial public offering of its growing collaboration software unit, Compuware seems to have a long-term battle on its hands with the activist hedge fund.

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