Bulking Up in the Land of the Software Giants
By
Michael Brush
August 04, 2005
Normally when you combine a struggling company with a weak one, you just get
a bigger struggling company.
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That’s what lots of investors concluded in early June when Lawson Software (LWSN)
– which sells enterprise management software – announced it was merging with
a Swedish software company called Intentia.
Intentia recently posted an operating loss. And while Lawson reported
profits last quarter, it got there through cost cutting -- since licensing
revenue growth has been weak.
“Ho hum,” concluded investors. Analysts downgraded Lawson because of the
uncertainties. Speculators hoping Lawson itself was a target dumped shares.
So the stock plummeted to $5 from $6 on news of the deal.
The insider buying
Since then, however, insiders stepped up and purchased $698,000 worth of
stock in the first half of July at prices from $5.34 to $5.56. The future is
no more certain now for the Lawson-Intentia merger. But in keeping with the
spirit of this column, we’ll ignore the analysts and the market crowd and go
with the insiders, placing a bet that this merger might pay off.
Besides, the logic of this merger makes sense – as hard as it may be to
combine companies on two continents that work in different languages. Here’s
why.
* There may be synergies. That’s a cliché managers trot out in any
merger. But here there is some logic that holds up. Lawson sells management
software that helps companies figure out their finances, run human
resources, and deal with procurement. Intentia focuses more on manufacturing
and distribution.
So in time, both sides can presumably sell their software to each other’s
customer base. Besides, if things click, the merger will literally open up
new worlds on two continents for both. Lawson estimates the potential market
for the combined company nearly triples to $5.6 billion from $2 billion.
* Lawson offers a third way. With the purchase of PeopleSoft (which
bought J.D. Edwards) by Oracle (ORCL),
that leaves two main players specialized in enterprise resource software:
Oracle and SAP (SAP).
But post merger, Lawson will be big enough to offer an option to companies
that want an alternative to the big two – potential clients that may have
stayed away from Lawson before because of its size.
* Costs can come down more. There’s a lot more cost cutting ahead for
Lawson as it moves more of its business to places in the world with cheaper
labor. Cost cutting is not something that ever supports sustainable earnings
growth. But if those hoped-for synergies come about, it will mean better
profit growth since sales will be spread out over a lower cost base.
* The stock looks cheap. On its own, Lawson looks like it goes for
1.72 times sales – already a fairly decent valuation for a software company.
But Lawson has around $230 million in cash, or $2.29 per share. This means
you can cut that price to sales ratio in half – which makes Lawson downright
cheap. We’ll get better detail on the financials of the combined company
when Lawson files more documents with securities regulators in the U.S. this
month. But Intentia reportedly brings more cash to this marriage than debt.
The bottom line: Corporate mergers fail more often than not. But this
one’s backed by some significant insider buying and it has a logic that
makes sense. We don’t know if it will ever work out – which is why you
should take a reasonable position in Lawson in a diversified portfolio. On
the other hand, the financials are strong – providing some downside
protection – and the insider buying suggests this intercontinental marriage
may just last. I’ll buy right here with at least a year’s time horizon.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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