There is market concern that DiData is offering too much for the Nasdaq-listed Proxicom
Belinda Anderson
If DiData’s bid for Proxicom goes through it will end up with a significantly enhanced global presence in the interactive commerce arena, with numerous world-class clients such as General Electric, Merrill Lynch and America Online.
But if its bid does not go through the group will still have managed to raise its presence in a global market as the South African-founded, London-listed group that took on the mighty Compaq.
“The PR that they are getting out of bidding against the likes of Compaq, I think its wonderful,” says Claude van Cuyck, portfolio manager at Gryphon Asset Management.
He points out: “There are a lot of other e-services players in the market and potential acquisitions, so they certainly don’t lose all if the bid does fail at the end of the day.”
Managing director of SG Securities David Shapiro says DiData has tried to guard against entering a bidding war and has firmly stated its desire for Proxicom through the price they are pitching for it.
“I believe that’s why they took it 30% above. They really took Compaq out and said: ‘Listen, we want this company, we are not going to go into a trade-off, let’s take it way beyond it.’ [Compaq] were only prepared to bid about $5,75. They are saying, let’s take it away from them now and knock them out completely.”
But even if a bidding war does ensue and Compaq comes back with a counter offer which it has three days to do after the board of Proxicom notifies it officially of the rival offer DiData will certainly have the muscle to stand up for its desires. It said only months ago that it plans to spend at least $500-million on its i-commerce acquisition.
Thereafter it will still have about $600-million to spend on other purchases, earmarked for more networking businesses in the United States and possibly Europe.
And in its defence, Van Cuyck says he has every confidence that DiData will walk away if it believes the price has become too high to offer value. Compaq officially has until May 14, 5pm New York City time, to raise its offer (about midnight on May 14, South African time).
Van Cuyck says positive factors about Proxicom include its global footprint, good client base and the fact that it is active in seven vertical markets. “DiData needs these sorts of companies. It’s impossible to time this market perfectly. They’ve done well to stay out of the market until now.”
Van Cuyck says the current market presents a “window of opportunity” for buyers
looking for value and to wait another six to nine months could be foolish.
Shapiro says of the offer price: “What price is expensive? No one really knows, but I think if they’ve got a long-term strategy in place, and they did their due diligence and really feel this is the right price, then I think in the long run it’s not going to make that much difference.”
But the market reaction shows clearly that it cannot shake the feeling that DiData is paying too much. The underlying belief seems to be that DiData may have panicked and jumped for Proxicom when it thought it might lose out to Compaq.
Sage Internet fund head Iain Anderson said the deal did seem a bit rushed. “If they have been looking at it for a while, then why didn’t they make an offer at $3?”
The share price of DiData slipped by about 4,5% for two consecutive days after the deal was announced, and movements later in the week showed no signs of turning.
The price being offered is $7,50 a share, or a total of $448-million a 30% premium to Compaq’s $5,75 offer for the company. The price includes a cash element of $72-
million. Proxicom was trading at $62 in the middle of last year, but came down to less than $2 a share with the crash of tech stocks.
DiData executive director Dirk Ackerman says the Compaq offer was tabled while DiData was engaged in discussions with a number of other parties and was busy undertaking a due diligence of Proxicom.
Anet Ahern of BoE Asset Management calls the market concern around the price of the deal an element of “forecast risk”, based on a level of uncertainty surrounding Proxicom’s
future profitability. It has a fairly good track record and has rapidly expanded its market share, evidenced by revenue growth from $82,7-million in 1999 to $207-million last year. But it took a $57-million restructuring charge in the first quarter this year and reported a pro forma earnings loss of 13c a share for the three months to March.
Ahern says in comparison to other similar deals DiData is paying quite a premium. “IBM bought a company said to be similar, called Mainspring, and DiData is actually paying more than IBM did for that company so it’s not even reflective of recent deals.”
Ackerman says one has to look carefully at the value Proxicom could add to DiData’s
business. “This integration combines both the skills of the network infrastructure and the application software enhancement that comes from Proxicom, and this is a position that we state we want to dominate globally for a long time. So the successful acquisition and integration of Proxicom would place DiData in a leading position to address the emerging requirement for integrated networking and software solutions.”
Proxicom is headquartered in the US and has numerous offices throughout the continent,
but it also has offices in London, Munich, Paris and Rome. It consists of 1 000
professionals working on developing electronic business solutions for companies in sectors ranging from media to energy and retail.
The more DiData pays, the more likely the deal is to be earnings dilutive in the short term. But the market is unlikely to look favourably on DiData in the short term whether it does the deal or not, as most IT companies continue to take a hammering and see reduced ratings. So there’s no point in not doing the deal for short-term considerations if it will be beneficial to the company in the long term.
DiData’s interim results are due for release on Tuesday. It knows the market doesn’t like surprises so it’s unlikely there will be any. If it manages to clinch the Proxicom deal, it would be up to DiData to make sure it has management buy-in from Proxicom in order to successfully integrate the business with its own. It has stood up to similar, though smaller, challenges for example with the integration of Comparex’s European businesses.
A DiData supporter would say it thinks carefully enough not to make mistakes. A DiData critic would say everyone has to make a mistake at some stage. Hopefully the group won’t make a mistake of this magnitude.