Many reasons contribute to the discount in PureAtria shares.
I have been watching the stock of Rational and PureAtria for a couple of years now. I have also had an opportunity to observe and occasionally talk with Rational and PureAtria shareholders in this and other forums. (Though I've been more of a lurker here lately.) I have always had the impression that Atria (and then PureAtria) had an unusually large amount of speculators who didn't know much about the software development tools business. The former Atria's CEO, Paul Levine, (now PureAtria's COB) has a reputation as a dynamic speaker and was very good at convincing investors to bet money on his company. When Pure and Atria Software announced their merger last year, their stocks got hammered much to my surprise. These were two companies that already had a good relationship and heavy overlap in their customer base. What I discovered in talking with investors afterward is that most of the sell-off appeared to be driven by Atria investors. They couldn't see the synergy in this merger. All they saw was that their favorite high rising stock was being merged with Pure Software whose stock performance had been nearly flat since since its IPO. Many didn't even know anything about Pure Software. Of those that did, some weren't comfortable with Pure's growth by acquisition strategy.
PureAtria's stock rebounded in third quarter '96 with many other tech stocks and with the completion of the merger. However, it appeared to be another stock lift by speculators. I heard alot of "in a year, this company will have taken over the Windows development tools market, just like it did with UNIX." (Personally, I think the company will eventually become a dominant player; but, at the time, one year was definitely two short of a time frame. Only recently have I seen signs that PureAtria is making sginificant inroads in traditional Windows development shops, as opposed to traditional UNIX shops planning on supporting or migrating to WindowsNT.)
PureAtria was quick to try the patience of their speculative stockholders. First, PureAtria decides to buy Integrity QA before getting their own house in order. Then, PureAtria's quarterly reports demonstrate revenue growth that doesn't quite support their stock valuation. In fact, the speculation in this stock was made quite evident in a two million share trade made a couple of days after a slightly disappointing earnings report.
Last Monday, PureAtria pre-announces very disappointing earnings citing merger problems and also announces that they have entered into a merger agreement with another company, Rational. Now, compound that with jitters over interest rates. Now, add the not so distant memory that the Pure and Atria merger announcement caused a drop in stock valuation of over 50% in a two month period. It all equals one big sell-off by PureAtria speculators. I doubt many of them even know much about Rational Software. They don't care about the merger value of PureAtria either. They probably believe that it is more likely for Rational's stock to cave than for PureAtria's stock to rebound. Afterall, we are also approaching the months in which, during the last few years, tech stocks have experienced a correction. Moreover, the lawsuits haven't surfaced yet. (Beleive me, they're coming.)
I don't beleive for one bit that speculation about the merger falling through is maintaining the wide discount. Anyone at all familiar with Rational's management would know that stock price does not affect their decisions and that they did not enter this merger agreement lightly. Moreover, the thought of Rational shareholders voting against Rational's management is fantasy. The only thing such a vote will guarentee is an exodus of Rational's management; definitely not something Rational shareholders will want. Also, the merger aggreement probably contains provisions that would make it financially painful for Rational (or PureAtria) to back-out. Keep in mind that Rational is essentially swallowing PureAtria so the provisions are probably more favorable to PureAtria than the other way around.
Basically, what I'm speculating is that the "discount" has arisen because PureAtria shareholders are venting their disgust by dumping shares. I also get the impression that Rational shareholders have more confidence in their company and are less likely to sell. Remember, these two stocks are only lightly tied by their "merger value" right now. The one thing I have learned about the stock market in the 90's is that perception is becoming more of a factor in a stocks movement that its financial fundamentals.
So, what's keeping Rational's price up? Why aren't those investors, that have been buying Rational shares, buying PureAtria shares instead given the discounts. Some of it could be insider buying. Some of it could be that Rational had a disproportionate amount of short sellers (compared to PureAtria) and many of those short sellers are locking in profits. I've heard some rumors that certain brokerage houses won't allow clients to buy PureAtria on margin; so those investors can only buy Rational stock. (On the other hand, PureAtria may also have had a large amount of its shares purchased on margin on which investors are being called and forced to sell.) Some of it could simply be conservative investing; particularly among investors who were already Rational shareholders. PureAtria's irrational activity may simply be scaring away conservative investors; those investors simply feel more comfortable investing in Rational which appears to be a good bargain on its own. In particular, many Rational shareholders may be using this opportunity to increase their positions. I've even heard one investor express the opinion that if PureAtria's price keeps falling, Rational might change the transaction to a cash buyout at the lower price.
Personally, I think investing in PASW is a great opportunity right now. In fact, I think its a great hedge against further market downturn. At these levels, RATL would have to drop over 30% before new PASW investors would experience an unrealized loss. |
