Event Summary
What
had initially looked like the CRM (customer relationship management) market's
version of the Oracle-PeopleSoft takeover saga in the ERP (enterprise
resource planning) market, seems to have recently had a closure with relatively
graceful winners and losers, despite an inevitable slight dose of drama, twists
and turns, and "playing hard to get" throughout the process.
Namely,
on December 8, Pivotal Corporation (NASDAQ: PVTL; TSX: PVT),
a Vancouver, Canada-based mid-market CRM provider, announced that it proposed
a strategic combination with CDC Software. CDC Software is
a wholly owned subsidiary of chinadotcom (NASDAQ: CHINA), a
global enterprise software and mobile applications provider. This will position
Pivotal to re-establish a more esteemed position in the mid-enterprise CRM market.
Subject to the approval of Pivotal's shareholders, the Supreme Court of British
Columbia, and customary closing conditions, this transaction is expected to
close before the end of February 2004. Following the closing of the transaction,
Pivotal also announced that it expects to accelerate investments in its growth
including increasing technical support its research and development headcount
by up to forty percent, resuming the expansion of its research and development
headcount, resuming its acquisition program, expanding distribution capabilities
in Asia through CDC Software, and increasing marketing spending by up to 200
percent.
Pivotal will operate as a distinct business unit within CDC Software, which should provide Pivotal with significant financial support in its profitable and growing operations: a $363 million cash position as of September 30, 2003 and an $830 million market capitalization as of December 4, 2003. The Pivotal strategy, brand, product architecture, cross industry applications, vertical applications, partners, people, and management team will reportedly form the foundation of this business unit. According to Peter Yip, CEO of chinadotcom and the parent company of CDC Software, CDC has been focusing on enterprise software and mobile applications globally, including CRM, ERP, supply chain management (SCM), and business intelligence (BI). Pivotal will reportedly be the cornerstone of the company's CRM strategy, and CDC anticipates that the acquisition will prove accretive for the combined entity.
As
Pivotal has done in the past, CDC will, from now on, focus on mid-sized enterprises
around the world and across multiple industries. CDC touts that this announcement,
along with the planned acquisition of Ross Systems, a mid-market
process ERP vendor (see chinadotcom
in The 'Process' of Acquiring Ross Systems), and the acquisitions of Industri-Matematik
International Corporation (IMI), a provider of SCM solutions in the
US and Europe, and a European business intelligence and financial performance
software developer CIP-Global ApS, demonstrates that the company
is making great progress in the execution of its software strategy.
On its hand, as the cornerstone of CDC Software's CRM strategy, Pivotal hopes to drive accretive benefits to the chinadotcom group, particularly as it implements its post-closing initiatives. As part of CDC Software, Pivotal will in turn supposedly benefit in five distinct ways by being able to
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provide long-term financial stability to its prospects, customers, and partners
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continue to aggressively and strategically invest in its future, including
increasing investments in product, marketing, sales force and services, and
recommence its acquisition program
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cross-sell Pivotal solutions into CDC's soon to be more than 1,600 other customers
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continue to aggressively build its Asian business by leveraging CDC's established
distribution capability
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augment its offshore capabilities in India by accessing chinadotcom's cost-effective
India and China-based offshore resources.
It is interesting to note that CDC Software was a latecomer to the bidding contest that erupted two months earlier in October. As a matter of fact, CDC had to rework its "first cut" proposal, since its initial bid was originally rejected by the Pivotal board which cited there were too many conditions attached to the deal. Therefore, for the reason of clarity and to gain some insight about the competitive space, it might be useful to chronologically review the turns of events that have led to the final sale of Pivotal, which did not exactly occur in a "first come, first served" fashion.
This
is Part One of a three-part note.
Part
Two will discuss the market impact.
Part
Three will cover challenges and make user recommendations.
Background
It
all started publicly on October 8, given that many things happened behind the
scenes following Pivotal's hiring of its financial advisor, RBC Capital
Markets, which, since April 2002 reviewed many strategic alternatives
for the company. Pivotal announced a definitive agreement with Oak Investment
Partners which would pay $1.78 (USD) cash per share for all of the
outstanding shares of Pivotal. Oak also would have paid an additional consideration
of up to $0.03 (USD) per share depending on the company's financial performance
up to October 16th, 2003. Concurrently, Pivotal's business would have been combined
with Talisma Corporation, a niche provider of Microsoft-based
eService solutions, and Oak Investment Partners, the controlling shareholder
of the combined business. At that time, the parties anticipated that the transaction
would close in November or December of 2003. Pivotal's new management team was
to be comprised of key members of both Pivotal's and Talisma's current management
teams. Talisma, a privately-held company based in Kirkland, Washington, US,
has licensed software to more than 400 companies, and, according to all parties,
Pivotal and Talisma were a winning combination, with a strong cultural match,
complementary products, architectures and services, and a shared technology
and solutions vision.
Then,
just before what was hailed as a fairytale deal from Oak was finalized, the
long time rival of Pivotal, Onyx Software Corporation (NASDAQ:
ONXS), jumped in with its own unsolicited competitive bid, which was eventually
rejected. Namely, on November 14, Pivotal announced that its Special Committee
of the Board of Directors recommended that the board not support the proposal
of Onyx Software Corporation. Onyx delivered its proposal to the Board and the
Special Committee on November 12, just four business days prior to the meeting
of Pivotal security holders to approve the Oak/Talisma transaction.
In reaching its recommendation, the Special Committee, with the assistance of its financial and legal advisors, considered a variety of factors relating to Onyx, the prospects for a combined Pivotal/Onyx entity, and closing, market and timing risks associated with Onyx's proposal. The Special Committee considered no single factor to be determinative in the formation of its recommendation, although certain aspects, such as the absence of an actual offer; the comparison of a proposal involving shares of fluctuating value and liquidity to an existing agreement for a fixed cash price; and the questionable profile and capitalization of a merged Pivotal/Onyx entity, were constantly reinforced by other factors considered.
First, Onyx was not deemed an "attractive merger partner for Pivotal," since the Special Committee's considerations included nearly a dozen grave incriminating aspects of Onyx as a potential cashless merger partner. Some of these aspects are outlined below:
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the Onyx share price has underperformed both the NASDAQ and the Pivotal share
price over the last twelve months
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Onyx's limited access to capital on favorable terms as demonstrated in its
recent financing history
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Onyx's history of small acquisitions and absence of experience in completing
larger transactions and the integration issues associated therewith
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low license to service mix in Onyx's revenue
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Onyx is not currently profitable
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Onyx's cash position is not attractive, and the fact that it has committed
a significant amount of its available cash to ongoing restructurings and to
secure letters of credit
The second group of serious reasons, "merged Pivotal/Onyx would not be an attractive entity," was also long. Some reasons given were
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Questionable synergies compared with significant and inevitable cash costs
of combining and integrating the two entities
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the potential loss of customers as evidenced by a number of strong and unsolicited
expressions of concern that Pivotal received from its customers concerning
a merger with Onyx, and no customer expressions of support
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the absence of a significant "financial sponsor" for the merged entity and
the prospect of limited access to attractively priced capital in the near
term
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the considerable amount of redundancy between product lines which would likely
to result in few cross-selling revenue synergies and would likely lead to
either higher costs to support products or customer attrition if one product
line is favored over the other
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no indications of who would manage or direct the combined entity or whether
any board seats would specifically be designated for representatives of Pivotal's
shareholders
At about the same time, on November 18, another unsolicited bid was thrown on the table, this time from CDC Software Corporation. The proposal was non-binding and highly conditional. The bid therefore did not, in the Special Committee's view, constitute a proposal that was likely to result in a "superior transaction." Had the bid shown such prospects, it would have permitted Pivotal to further pursue it without breaching the terms of Pivitol's arrangement agreement with Oak/Talisma. Pivotal then reaffirmed its support for the proposed acquisition by Oak Investment Partners and Talisma Corp. that was to be considered at a shareholder meeting on November 21, 2003. Notwithstanding that the conditional proposal had a higher potential price for Pivotal shareholders; the Special Committee's view was that the value of this consideration had to be significantly discounted to reflect the uncertainty and closing risks associated with it. In the Special Committee's view, this risk and uncertainty had more than offset the consideration's potential increase over that of the former arrangement with the Oak Group.
However, CDC then came back with an amended proposal on December 1, which the Special Committee had subsequently determined a "superior transaction" within the meaning of the former arrangement agreement with Oak Investment Partners and Talisma Corporation. CDC was offering to acquire all of the outstanding shares of Pivotal under a plan of arrangement that will, subject to certain conditions, permit Pivotal shareholders to elect to receive for each Pivotal share, either
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$2.14 (USD) comprised of: (i) $1.00 cash (USD); plus (ii) $1.14 (USD) of common
shares of chinadotcom corporation. The value of the share portion of this
option will be calculated using the average closing price of the chinadotcom
shares on the NASDAQ National Market over the ten trading day period ending
two days prior to closing and there are no caps or collars applicable to the
calculation; or
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$2.00 (USD) in cash.
In simplified terms, CDC's new offer was a proposal to acquire Pivotal either through an all-cash or a cash-and-stock transaction, which valued Pivotal at $53-$57 million (USD), depending on which route the shareholders ultimately choose. In comparison, the Oak's offer roughly translated into $47 million (USD), while the spurned Onyx's all-stock swap offer amounted to even twenty percent more, valuing the company at $59 million (USD).
Ultimately, we come back to the December 8th announcement of Pivotal entering into a definitive arrangement agreement with chinadotcom corporation through its software unit, CDC Software Corporation. Pursuant to its agreement with chinadotcom and CDC, Pivotal has already received a $2 million (USD) loan from chinadotcom bearing interest at the US prime rate to be used to pay $1.5 million (USD) to break from its Talisma agreement, fund working capital requirements, and for general corporate purposes. The parties anticipate that an application will be made to the Supreme Court of British Columbia to call an extraordinary meeting of Pivotal's shareholders to consider and approve the plan of arrangement in early January of 2004 and a proxy circular, in respect of such meeting, will be mailed to Pivotal's shareholders in mid-January. The meeting of Pivotal's shareholders, the final application to the Supreme Court of British Columbia, and closing of the transaction will occur in February of 2004.
Mid-January saw a further update on developments as the British Columbia Supreme Court issued an interim order permitting Pivotal to call a meeting of its security holders to consider and approve the transaction with chinadotcom. The meeting will be held on February 23, and if the transactions are approved by all necessary security holder votes, Pivotal expects to make an application to the British Columbia Supreme Court for final approval of the transactions on February 24, and the transactions would then be expected to close on February 25.
Onyx Response
Under the terms of Pivotal's agreement with Oak Investment Partners, Oak Investment Partners had a right to match chinadotcom and CDC's offer, but declined to exercise this right. Accordingly, Pivotal has terminated its agreement with Oak Investment Partners and is paying a $1.5 million (USD) break fee to Talisma Corporation in accordance with the terms of that agreement.
Onyx
too announced at the beginning of December that it had elected not to further
pursue the bid. Rather, it announced a migration program for flustered Pivotal
customers. The program enables customers to trade their existing Pivotal licenses
for licenses of Onyx Enterprise CRM 4.5. Depending on certain
time brackets and windows of opportunity, the program provides up to a one-for-one
exchange of user licenses, allowing Pivotal customers to cost-effectively migrate
to Onyx Software's fourth-generation, internet-architected CRM platform. In
other words, the prospect has 60 days from the first meeting and software demo
with Onyx to make a decision to switch to Onyx to get a one-for-one swap of
software, meaning the company will not pay any license fee for the Onyx' product.
However, if the prospect waits between 60 and 120 days, the swap ratio will
fall to one Onyx license per one-and-one-half Pivotal licenses, while after
120 days the ratio will become one to two.
Dismissing the Pivotal's above reasons for rejecting its bid as "the pot calling the kettle black", Onyx now touts the following rationale for users switching the CRM provider:
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Onyx CRM offers the simplicity and low total-cost-of-ownership (TCO) associated
with pure web architecture, as well as a host of powerful features that will
be new to Pivotal web product users.
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Onyx offers customer-deployed vertical extensions in financial services, healthcare,
and government.
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Onyx has demonstrated global deployment capabilities in the Americas, Europe,
Asia, and the Pacific Rim, with multi-site deployments by name-brand companies
in each region.
This
concludes Part One of a three-part note.
Part
Two will discuss the market impact.
Part
Three will cover challenges and make user recommendations.