Here's an excerpt from an article from the wall street journal
>>>Momentum investors sometimes bail out after
mergers are announced, such as in Ascend
Communications Inc.'s planned acquisition of
Cascade Communications Corp. They conclude
that any chance of an upward earnings surprise is
gone, and the larger company is likely to report
poorer earnings until it has digested the
acquisition. "When company A buys company B,
a lot of the earnings surprise is given away"
frequently, one analyst noted.
The harsh reaction to Rational's latest acquisition
also points to specific problems that have
plagued the Pure Atria merger since last June.
Andrew Roskill, an analyst at Smith Barney, said
the company has had trouble integrating the Pure
and Atria sales forces. One reason is that the
head salesmen for both Pure and Atria left
following the merger. Mr. Roskill said the new
deal also carries the risk of disruptions in
integrating Rational's sales force with that of Pure
Atria.
Others said investors are concerned about
overlap between the Rational and Pure Atria
product lines, which could take time to integrate.
Some big shareholders, moreover, are worried
that customers are holding up on purchases of
software development tools -- unsure about new
technologies and the impact of changes when
companies adjust their programs to cope with the
date change at the year 2000. A lot of portfolio
managers "feel that this whole market is
confused," said Neil Cooper, an analyst at
Cruttenden Roth Inc.
Rational, based in Santa Clara, Calif., has been
a star in its niche. The company, founded in
1981, sells technology that helps companies
model their business processes and turn them
into computer programs, using building blocks of
computer code called "objects." Its stock surged
more than 3 1/2 times last year in price, one of
the biggest jumps among all publicly traded
companies, and has successfully completed five
acquisitions in the past several years.
Paul D. Levy, Rational's chairman and chief
executive officer, noted that the company has
proved with those deals that it can integrate
product lines and sales forces. "The unassailable
logic of this deal is that there will be no close
second to this company after the merger," he
said. "It is the leading company in this market
space."
Chuck Bay, Pure Atria's chief financial officer,
said the negative stock-market reaction wasn't a
big surprise, given the volatility caused by
momentum investors. "I have had a lot of
discussions with investors today -- like one every
10 minutes," he said. But the short-term impact
on market value is less important than the chance
to build a major technology franchise for the
future. "This is something that in a year people
will look back [on] and say this was a very very
good move."
Mr. Levy will keep his titles with the combined
companies. Michael Devlin, Rational's president,
will also keep that title. Reed Hastings, Pure
Atria's chief executive officer, will become chief
technical officer of the combined companies. |
