Ariba-Agile Deal Still in the Works -- For a Fraction of the Price
By Joe Bousquin
3/13/01 8:11 AM ET
There may be no better illustration of the carnage in software stocks than Ariba's (ARBA:Nasdaq - news) proposed acquisition of Agile Software (AGIL:Nasdaq - news). Six weeks ago it was valued at $2.55 billion. Today, the all-stock deal is worth just $721 million.
Even more telling, though, is that the deal is still likely to close. Maybe it's because neither company really has many other options at this point, or it may be due to the added pressure that i2 Technologies' (ITWO:Nasdaq - news) proposed acquisition of RightWorks puts on them both.
The recent rash of mergers and partnerships in the industry means both companies need to expand the scope of their software offerings to compete. They are up against beefed-up rivals, such as the new i2 and the partnership of Commerce One (CMRC:Nasdaq - news) and SAP (SAP:NYSE ADR - news). Ariba makes software that lets companies buy supplies over the Internet. Agile makes software that helps companies collaborate, in real time, on joint projects. While both of those areas have seen significant growth in recent years, each is regarded as somewhat of a niche within the software industry, and the companies are perceived as being stronger together than they are alone.
Agile also has very little wiggle room under the terms of the contract. There's no collar on the deal, which means that Agile can't back out because of a drop in Ariba's stock price. Then there's the $110 million walk-away fee that Agile would have to pay if it balked now.
When the deal was announced Jan. 30, Ariba's stock was worth $40. Today, it's at $11.31, 72% lower. Agile's stock hasn't fared much better. It's off 65% since the deal was announced.
In other terms, Agile's market cap was just north of $2 billion when the deal was announced, and Ariba's offer amounted to a $550 million premium for Agile's shareholders. At the time, analysts derided Ariba for paying such a high price for Agile, and Ariba executives were on the defensive to explain it.
But based on Ariba's closing price on Monday, Ariba is now getting a bargain. On Monday the deal only had a $721 million price tag, or just $4 million more than Agile's current market cap. In Wall Street's eyes, that amounts to little more than a rounding error.
Bryan Stolle, Agile's CEO, says the unfortunate drops in respective share prices aside, the deal is going through.
"When you're doing a stock-to-stock deal, it's always a moving target," Stolle says. "This wasn't done for a short-term impact. This was all about what do we think will be strategic over the next five to 10 years. When you put Ariba and Agile together, you really get scale."
Analysts say the deal will go through because it's the best thing Agile has going, especially in light of the on-the-cheap deal that i2 got on RightWorks last week.
"If you're looking at it from Agile's point of view, and what they would get if they went out and found someone else, they still wouldn't get what Ariba's paying," says Jon Ekoniak, an analyst at U.S. Bancorp Piper Jaffray who rates Ariba a hold. "Agile's still getting seven times their forward revenue. If you look at what RightWorks got -- just two times next year's revenue -- that's still pretty good." (Ekoniak's firm hasn't done underwriting for Ariba.)
Then, there's the competition.
"In this environment, these partnerships and combinations are getting more important for everybody," says Thomas Berquist, an analyst at Goldman, Sachs who rates Ariba a market underperform. "Everyone has raised the bar in terms of the functionality you have to offer. If either Ariba or Agile broke it off, they'd both be alone and flapping in the wind." (Goldman hasn't done banking for Ariba.)
Agile's Stolle concedes that watching the dropping stock prices hasn't been fun. But he also contends that in the long term, the deal will pay off for Agile's shareholders.
"You're never happy when something like that happens," Stolle says. "When you announce a deal, the ideal is that the stock prices stay relatively the same."
Of course, plenty of people weren't too happy with the deal to begin with.
"I was pretty disappointed in the deal," says Chris Bonavico, manager of the Transamerica Premier Aggressive Growth fund, who sold his Agile holdings after the deal was announced. "I believed in Agile as a stand-alone company. I always wondered why they had to take that bid."
Now, it looks like Agile will still be taking that bid. It'll just be a lot smaller than what it originally bargained for.