On May 9th, 2022, a jury awarded Appian more than $2 billion for misappropriation of trade secrets by Pegasystems (Pega). On May 10th, Pega responded to the decision with this 8K filing to the SEC. The verdict, by any calculations, is huge. Since the verdict, multiple law firms announced legal actions on behalf of Pega shareholders. Pega strongly disputes both the verdict as well as the size of the award and will pursue legal recourse. Based on interactions with Forrester clients, this verdict is affecting buying patterns. Forrester is in no position to weigh in how this will play out in court, but there are still significant considerations at play:
Pega Is Wounded By This Ruling, However You Slice It
Any relationship with a software vendor requires significant risk analysis. With Pega, this is particularly true given the mission-critical workloads it often addresses. The verdict in this case must be taken into consideration and evaluated as a risk factor. Uncertainty is never good when assessing long-term, critical business partnerships. Forrester clients have already expressed concern. While Pega looks to allay these concerns, at the very least, this will be a lengthy process and will continue to cause concern. At worst, a $2B payout could significantly affect future investments.
The Prevailing Economic Headwinds Won’t Help
The timing of this verdict is not good for Pega. With prevailing opinion shifting toward the likelihood of an economic slowdown or even a recession, there are already dark clouds emerging over the software industry. With a new crop of process automation vendors emerging from the low-code space, including large portfolio vendors such as Microsoft, Salesforce, and ServiceNow, the competitive landscape will continue to shift. These and other low-code vendors have invested heavily in process automation, and while not as functionally robust as Pega, they represent lower-risk alternatives. Even in absence of the court ruling, Forrester clients were shifting process automation spend toward portfolio vendors. It is worth noting, however, that Pega has traditionally performed well during economic downturns.
Pega’s Strategy To Become A Strong Low-Code Player Just Became A Lot Harder
Pega built its reputation on solving the most complex process automation problems in the world, but a big part of its strategy going forward is to grab a hunk of the red-hot low-code platform market. Pega’s roots in digital process automation offer a rock-solid technology foundation for low-code, including citizen developer-friendly modeling and elegant declarative development tools. Pega’s best opportunity to extend into low-code is to move downstream within existing process automation customers. For most customers, this means a significant new investment and a long-term commitment. Considering the risk factors outlined above, expect offerings from more established portfolio vendors such as Microsoft and ServiceNow to look even more attractive as low-code standards. Pure-play low-code vendors like Mendix, OutSystems, and, of course, Appian also stand to gain.
Three Potential Outcomes
There are many ways that this could play out for Pega and for Pega customers. Forrester envisions three main possibilities:
- Legal developments alter the verdict. Forrester will refrain from commenting on the legal matters of this case, other than to say that a rapid conclusion to the process that leaves Pega in a strong financial position mitigates much, not all, of the risk outlined in this analysis.
- Pega stays the course. Assuming Pega stays the course and fights the case in court, it is likely to be a time-consuming process, during which Pega will need to effectively assuage the fears of the market. While Pega may be able to survive a $2B payout, it would cause significant and valid concern to customers and prospects.
- Another suitor comes calling. It is critical to note that Pega offers excellent technology and has a stellar reputation for serving customers. And as noted earlier, some of this technology is directly applicable to the emerging low-code market opportunity. Pega is an attractive company. The recent drop in stock prices, particularly acute in technology, coupled with Pega’s price decline from the fallout of the lawsuit makes it a bargain at roughly $4.0B market cap. One possibility is that a large vendor that’s late to low-code and craving excellent process automation could acquire Pega. Important note: CEO and Founder Alan Trefler is the majority shareholder and has always stated that he is adamantly against any acquisition.