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New Proxicom suitor challenges Compaq

Just as Proxicom is on its way to the altar with the computer giant, a little-known South African company offers to buy the Internet services company for a higher price.

Just as Proxicom was revving up to be acquired by Compaq, a little-known South African company on Monday offered to buy the Internet services company for a higher price. Shares of Proxicom soared on the news as investors hoped for a bidding war, something analysts said is unlikely.

Proxicom, an Internet consulting company, has found itself in demand even though it has been rattled along with other Internet services companies. Last Thursday, Compaq offered to buy Proxicom in a deal valuing it at $5.75 a share, or $266 million.

With the Proxicom purchase, Compaq planned to bolster its own services fleet. Proxicom makes business-to-business e-commerce sites and offers services such as application development, wireless support, systems and network design.

But on Monday South-African based Dimension Data Holdings offered $7.50 a share for Proxicom, 30 percent more than Compaq's bid. Investors cheered the counteroffer, driving shares up $1.69, or 30 percent, to $7.35 at midday.

That's a lot of attention for Proxicom, which hit new lows recently, along with other struggling consulting firms such as Razorfish, IXL Enterprises and Viant. On Friday, Proxicom reported a loss of 13 cents a share, in line with reduced estimates.

Despite Dimension Data's higher offer, Compaq said its $266 million bid for Proxicom remains in effect. "The Proxicom board has not changed its recommendation to shareholders," Compaq said. "The merger agreement between Compaq and Proxicom continues in effect."

"That doesn't mean the Dimension Data deal is off," said J.P. Morgan analyst Robert St Jean. Compaq's statement only means that Proxicom has yet to notify the PC maker about whether it is accepting the Dimension Data bid.

And that could take a while, analysts said.

A tough decision
The counteroffer will be a difficult decision for Proxicom, said a source close to the company, speaking on condition of anonymity. He predicted Proxicom will take at least a few days to decide whether to accept the Dimension Data deal. Once Proxicom notifies Compaq of its decision, the PC maker has three days to respond with a higher offer.

Although the company would fetch a higher price from Dimension Data, something that would surely please shareholders, Proxicom will have to consider other aspects of the deal, such as how well the businesses would fit together and where its staff will be best utilized, analysts said.

Dimension Data designs computer and communications networks using equipment from suppliers such as Cisco Systems and Nortel Networks. It also provides customer relationship management and procurement software through its i-Commerce division.

The fact that Dimension Data is based in South Africa may also cause some concern, as it could contribute to employee retention problems, the source added. Employees may not want to travel such great distances. In addition, Proxicom's integration with Compaq is under way, something that gives it impetus to stay with the PC company.

Slim chance of bidding war
Analysts said a bidding war is unlikely over Proxicom because of weak macroeconomic conditions; and due to a glut of Internet services companies, Compaq could choose to acquire another company. "Last year, there would have been a bidding war," said A.G. Edwards & Son analyst Brett Miller.

Proxicom's "not the only deal" Compaq has been working on, Miller added. The company has "made no bones about the fact that they're looking in this space," and could find other companies that suit its needs better.

While Proxicom's strong point is its technology, Compaq is actually more concerned with management and marketing, areas in which Proxicom is relatively weak. Compaq is also eyeing some smaller, private companies that can fill in geographic holes on either U.S. coast, in Europe and the Asia-Pacific region, Miller said.

"Compaq has a lot more opportunities in front of them," Miller said. "They're in the driver's seat at this point in time."

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