Autonomy, a Cambridge-based software company, will buy its US rival Verity for $500m (£285m) to increase its share of the rapidly growing electronic search market.
Autonomy will raise £150m in a rights issue to fund the deal. Its shares shot up from 320p to 401p when the acquisition was announced yesterday. The California-based Verity counts the software and computer giants Cisco and Hewlett-Packard and the telephone company Verizon among its customers. When it was founded in the 1980s its software, based on "key word" search, had a leading position in the market.
Other companies including Autonomy have since invented more sophisticated software, which does not just look for specific words but also understands their context, narrowing down the results.
Both companies help clients order and search data which is not easily categorised and is called "unstructured", including documents, video and e-mails. The software is embedded in the computer systems of corporate customers.
Together the companies will have a large share of this market, called the "enterprise search market". This is part of the much larger search market dominated by internet search companies such as Google.
The transatlantic deal will boost Autonomy's presence in the US, where it makes half of its revenues and counts America's security services among its clients.
The enlarged group will also have a significant presence in the Far East, bringing together Autonomy's business in China and Verity's holdings in Japan.
Mike Lynch, Autonomy's chief executive and founder, said: "This is an acquisition that is expected to create a strong undisputed global leader in the unstructured information management market."
Autonomy hopes to inject its software into Verity's products, and also to sell its own software alongside that of the American company. Annualised cost synergies of $20m are expected, partly due to savings from delisting Verity from America's Nasdaq stock exchange.
Competitors to Verity and Autonomy include Corpora, an AIM-listed software provider which processes information based on "natural language". Another large rival is Fast Search & Transfer, a Norwegian company.
John M Lervik, the chief executive of Fast Search & Transfer, questioned the rationale for the deal. He said: "This comes as no surprise - we have been evaluating Verity and its offering and have found the price to be too high. Verity has had little to no growth over the years, and we see little, if any, synergy between their offerings and Autonomy's."Reuse content