4 November 2005 Autonomy, a Cambridge-based provider of search and infrastructure software, is set to buy its American rival Verity for $500 million in cash.

Verity makes business search and process management software and the price represents a 30% premium on its share price. Its revenues outstrip Autonomy’s but the British company is seeing its profits grow while Verity’s have slumped.

The acquisition has been partially funded by a rights issue worth $272 million, and the new, larger company would have had revenues of $227 million in the last 12 months, with around 16,000 customers.

Ovum analyst David Mitchell said the deal demonstrated again that IT companies were having to merge in order to survive: “Only through achieving scale can software companies afford the R&D needed to maintain the innovation and growth. By integrating Verity into their operations, Autonomy will help build their scale.”

Both Autonomy and Verity have seen increased competition from Google as the web search giant pushes into the enterprise market with desktop search tools and appliances.

Dr Mike Lynch, Autonomy’s CEO and co-founder, will continue as CEO of the enlarged company while Anthony Bettencourt, Verity’s CEO, will head up Autonomy’s US division.

Bettencourt said: “Autonomy’s technology has been designed over the years to be compatible with Verity’s products as is evidenced in existing joint customers. The combination will make available to each company’s customers the next generation technology and most advanced suite of functionality.”

The deal is expected to close by the end of 2005 and is subject to regulatory and shareholder approval.