Shares of Rational fell to as low as 12-3/4 today before closing at 13-5/8, down 9-3/4 from Friday. Meanwhile, Pure Atria's stock dove as low as 9-5/8 today before finishing the day at 10, down 7-3/4 from Friday.
Under the deal, Rational will exchange 0.90 shares of its common stock for every share of Pure Atria. Based on Friday's close, the deal would be valued at nearly $850 million, but today the purchase price was cut nearly in half as Wall Street gave a thumbs down to the deal.
The merger is expected to close in the fiscal second quarter that ends in September, and the company expects to take a one-time charge that has yet to be determined.
Roskill, who has not changed his ratings and is reviewing his earnings estimates, said Pure Atria has had problems integrating its sales force from an earlier merger with Integrity QA Software. The company released preliminary first-quarter results earlier this morning that indicated its revenues will fall below analysts' expectations in part because of problems with melding the sales force, Roskill added.
He also noted there is an overlap in the companies' software automation products, programs which allow companies to test the performance load of their applications.
Rational has been on an acquisition binge of late. It acquired SQA in February in a $300 million stock transaction and also picked up Microsoft Visual Test for $23 million in cash last October.
"Pure Atria will give us broader coverage so we can offer complete coverage on software testing," vice president of corporate marketing Jerry Rudisin said. He added the company's products cover critical software applications for Windows, Unix, and the Web.
He added that Pure Atria also sells some standalone software configuration products, which will be added to the company's existing product line.
Reed Hastings, Pure Atria's founder, president, and chief executive, will join Rational as chief technology officer.
Pure Atria's sales operation will be folded into Rational's worldwide sales organization. The research and development arm will be included in one or more of Rational's business units, Rudisin said.
Rational reported revenues of $32.3 million for its fiscal third quarter, up 34 percent from a year ago. It posted a net loss of $13.2 million, in part because of acquisitions costs from the Microsoft deal.
Pure Atria said its first-quarter revenues will fall around $30 million and that its net profits will range between 2 to 4 cents a share, excluding the one-time charge for Integrity.
Wall Street had been expecting the company to post net earnings of 12 cents a share, according to First Call.
Separately, Rational announced the resignation of Ronald Nordin, vice president of commercial information systems products and former chief executive of SQA, which Rational acquired in February. Nordin is resigning to pursue other interests.