Industry altered by host of deals; stocks are the lucre for Sterling, Microsoft, D&B - users see benefits - software merger mania

Software Magazine, Dec, 1994 by Colleen Frye

The merger mama that marks the modern software business has gained further momentum in recent months. Computer Associates International bought The Ask Group. Compuware bought Uniface. Sterling Software bought American Business Computer and KnowledgeWare. Microsoft bought Intuit. And Sybase bid for Powersoft.

Often, these are not outright purchases, though there is usually a richer "partner" among the two parties. The deals are typically more akin to mergers, with stocks as the fuel.

More "done deals" in the last quarter of 1994 win cap a year that saw merger and acquisition activity m the software and IS sector rise 13% over 1993 for the first six months, according to merger advisor Broadview Associates of Fort Lee, N.J. The back end of the year shows signs of keeping that pace, said Broadview's Managing Partner Alec Ellison.

In this climate, should users fear product commitments? Ellison says no. A healthy acquisition market, he said, "is generally quite positive." The trend reassures customers concerned about buying a good product from a small company with limited resources.

"They can assume [the firm] will grow and thrive, or be acquired," said Ellison," "That's good news for customers."

Pooling Interests

Tom Wood, senior programmer analyst at Fisher-Price Inc. in East Aurora, N.Y., said he looks at the acquisition in August of American Business Computer (ABC) by Dallas-based Sterling Software "as a benefit." The company uses ABC's EDI-ExCEL product, a Unix-based electronic data interchange (EDI) translator.

"Sterling has deep pockets," said Wood. "We were assured they'd keep the product, spend some money to improve it and broaden the user base. We see that as benefiting us." Said ABC's Chief Executive Officer Kimba Vasquez, "All the barriers are down. Together with Sterling we're positioned to address global market requirements and make dramatic changes in all aspects of electronic concern."

Sterling is throwing its efforts behind Mentor, ABCS next-generation product announced prior to the acquisition. Sterling will continue to support its own Gentran Basic Unix EDI product and offer maintenance releases through January 1997, but will not offer any enhancements, said Susan Eskin, vice president, marketing and product management for Sterling's Interchange Software Division.

Sterling acquired ABC in a stock transaction structured as a pooling of interests, a method of purchase that is increasing in the software industry. Stock deals accounted for 45% of all transactions in the first half of the year, up from 35% in 1993, according to Broadview.

And, in the last quarter of 1994, the stock deals continued. In November, Sterling expected to complete its acquisition of Atlanta-based KnowledgeWare in a stock transaction valued at $143 million. In October, Rockville, Md.-based Intersolv Inc. acquired The Software Edge in a stock deal valued at $5.7 million, and Microsoft Corp., Redmond, Wash., announced its intent to merge with Intuit in a $1.5 billion stock swap.

The Goal Congruent

Broadview's Erison said a big factor contributing to this increase in stock deals is the accounting advantage for the buyer. In a deal that qualifies as a pooling of interests, in which 90% of the purchase price is paid in stock, the buyer can avoid amortizing "goodwill, on the balance sheet, which negatively impacts earnings, he explained. Other factors include an increased number of publicly held software companies, and the equity value of stock in today's market.

Kevin Burns, Intersolv's chief executive officer and president, said he likes to pay in stock for another good reason. "You're betting on that company to continue to grow revenue and earnings. If the owners get Intersolv stock they become `goal-congruent' with us to maximize the value of the transaction to increase revenue.

"In contrast," he continued, "with a cash deal you write a check and they're out of here. We need their support for a period of time. Their motivation is higher [during the transition] if they have stock." In addition to The Software Edge, Intersolv acquired Q+E Software in April in a $35 million transaction, most of which was paid in stock, said Burns.

Of course, stock deals are subject to unforeseen market forces. Lotus Development Corp., in Cambridge, Mass., restructured its original agreement to purchase Softswitch - changing its initial 1.3-million-share-transaction to a $62 million cash deal - when Wall Street battered Lotus share prices.

For sellers of software companies, the biggest advantage to the stock deal is deferred tax payments. "Many times smart sellers on the other side of the table will push back and say, `We won't accept cash,'" Burns said.

David Friend, chairman and co-founder of Boston-based Pilot Software, has founded and sold two other companies throughout his career. In October he expected to finalize the sale of Pilot to Dun & Bradstreet (D&B) Corp. Although D&B Corp. is not disclosing the purchase price of the cash transaction, the company confirmed estimates in the $30 million dollar range.