DJ TALES OF THE TAPE: Web Services World Ripe For Shakeout
15 May 14:00
By Marcelo Prince
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Cast away and left for dead, Internet consulting
companies are suddenly in vogue again - at least among vulture investors and
M&A speculators.
The wooing of Proxicom Inc. (PXCM) by two large buyers caught Wall Street by
surprise last week and reignited speculation that the battered industry is ripe
for further consolidation. Many of these stocks have fallen more than 90% in
the past 12 months and now hover near single-digit lows.
"I expect to see lots of mergers in the next four or five months," says
Stephanie Moore, director of information technology services for GIGA
Information Group Inc., a market research firm.
"Most of the e-services or Internet integrators are up for sale and would
entertain offers from more stable traditional consulting or hardware
companies," Moore adds.
That was evident in two moves announced late Monday: the proposed buyout of
Agency.com Ltd. (ACOM) and the sale of Rare Medium Group Inc. (RRRR).
Fund managers, investment bankers and analysts who follow the out-of-favor
industry say some more deals are in the offering. But most expect any deal to
offer limited premiums and only involve the higher caliber companies. That's
why most of these stocks continue to languish.
"I think there's a handful of attractive" acquisition targets, says Deborah
Koch, co-manager of the Strong Advisor Technology Fund. She noted that several
of these companies are trading for less than their cash on hand, including
Scient Corp. (SCNT), Viant Corp. (VIAN) and Lante Corp. (LNTE).
There's no shortage of struggling Web professional services firms looking for
a white knight or, conversely, deep-pocketed, high-tech manufacturers and
overseas players looking to beef up their services offerings on the cheap.
"There are a lot of conversations going on among the major players," says
DavidBrand, a managing director who heads Lehman Brothers' technology M&A
group. "Big enterprise companies are looking actively, and the smaller guys are
figuring out whether they are sustainable on their own or are going to sell."
Late Monday, Agency.com proposed a deal to sell itself to Seneca Investments
LLC, an outfit recently formed by Agency.com's largest holder, Omnicom Group
Inc. (OMC), and Pegasus Partners II, a buyout firm. The deal offers a slight
premium and Agency.com shares were flat Tuesday at $2.55.
Omnicom through Seneca Investments also owns stakes in Razorfish Inc. (RAZF)
and Organic Inc. (OGNC), and is said to be interested in buying them as well.
Omnicom officials declined to comment.
Also Monday, Rare Medium, an Internet services firm, unveiled complex plans
to merge with Motient Corp. (MTNT), a debt-laden concern that Rare Medium had
agreed to lend up to $50 million last month. Motient operates a wireless
network for Blackberry e-mail pagers. Investors reacted cooly and Rare Medium
shares fell 30% to $1.22.
All of this follows Proxicom's decision Friday to accept a $448-million offer
from Dimension Data Holdings plc. It took that deal after Compaq Computer Corp.
(CPQ), which had previously struck a $336 million deal with Proxicom, elected
not to match the South African concern's counteroffer.
Investors Beware While Scanning For Deals
Some investors had been scanning the sector for opportunities even before
these recent deals.
George Gilbert, co-manager of the Northern Technology Fund, says he has been
"brainstorming" with colleagues about investing in foundering but cash-rich
Internet consulting firms, such as Lante, on the hope they get acquired by a
computer services giant, such as Electronic Data Systems Corp. (EDS). Lante,
which sports a market cap of $50 million, had $73 million in cash at the end of
March.
"If it's selling for less than cash, on a theoretical basis, they should be
able to liquidate the whole thing" and make a nice profit, Gilbert says.
But he remains on the sidelines because some "off-balance sheet liabilities"
- such as required severance payments, onerous customer contracts and
management's underwater options - may make takeovers less attractive or likely.
Although large computer services firms and overseas rivals are possible
suitors, industry watchers say those most likely to act soon are computer
hardware vendors, such as Compaq and Hewlett-Packard Co. (HWP), which have
already made failed overtures. Also Microsoft Corp. (MSFT), which recently
reorganized its global services unit, could be interested, Moore says.
Services are becoming more important to drive sales for product vendors,
analysts say, but not all these companies will be acquired. There are only six
or seven companies with good management, expertise and brand names; others will
either file for bankruptcy protection, continue to languish or merge with
wounded rivals, according to analysts and portfolio managers.
"Just because it's cheap doesn't mean somebody will step in and buy them,"
warns Koch, the Strong fund manager. Many of these once hot upstarts are no
longer growing while losing market share and people, she says, and "it can take
a long time to die off."
Indeed, there have been as many bankruptcies and Nasdaq delistings in 2001
as there have been acquisitions in this sector. And if the deals unwrapped so
far are any indication, shareholders shouldn't bet on fat takeover premiums.
"There are a lot of sellers and not enough buyers," says Brand, the Lehman
investment banker. Accordingly, premiums will be modest since buyers have
plenty of options and don't feel pressured to "price everything up" as
illustrated by Compaq's decision not to raise its bid for Proxicom.
Bankers and analysts say any future deals will continue to be small - under
$500 million - and involve Internet services firms with a particular geographic
focus or technological edge.
Moore, the GIGA analyst, says the most attractive targets are the "less
showy" publicly traded companies, such as Tanning Technology Corp. (TANN) and
AnswerThink Inc. (ANSR), and even some closely-held firms.
"There are great bargains out there but you really have to do your homework
because there are some bad deals as well," she adds. Moore notes that several
Internet firms are considering merging with one another, but such discussions
are preliminary and could prove disastrous.
-By Marcelo Prince, Dow Jones Newswires; 201-938-5244;
marcelo.prince@dowjones.com
(END) DOW JONES NEWS 05-15-01
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