Database software developer Sybase moved a step closer toward becoming a significant e-commerce applications player when it ponied up $373 million in stock for New Era of Networks Tuesday. But investors were less than thrilled by the deal.
Sybase (Nasdaq: SYBS) shares plunged $5.06, or 21 percent, to $19.44 Wednesday after the company announced it would convert each share of New Era of Networks (Nasdaq: NEON) stock into 0.3878 shares of its common stock.
The deal values New Era shares at around $9.50 a share, a 37 percent premium above Tuesday's closing price.
New Era of Networks shares inched up 38 cents to $7.31 Wednesday afternoon.
Sybase executives said the acquisition will close sometime in the second quarter and would be accounted for as a purchase on its balance sheet.
It will set up a new division for e-commerce applications under New Era Chief Executive Officer Rick Adam in an effort to go head-to-head with archenemy Oracle (Nasdaq: ORCL) and other e-commerce application vendors.
But Wednesday' dramatic sell-off, though fairly common following a major acquisition, indicates shareholders feel Sybase overpaid for a company that was unable to reach profitability mainly because of sloppy sales execution.
"I don't think they overpaid," said Ed Bierdeman, an analyst at Moors & Cabot. "I think they were fortunate enough to be able to purchase really good technology at a fire-sale price. They took advantage of the weak market conditions to fill in a missing piece in their product set."
Bierdeman rates the stock a "buy."
Sybase CEO Jon Chen defended the premium, saying the acquisition price values New Era at twice its trailing full-year sales.
Sybase executives said New Era's integration software will bolster its applications sales by as much as 20 percent in the next few years and add to its earnings as soon as the first quarter of fiscal 2002.
"Looking at the stock today, it appears that investors don't like the merger," Bierdeman said. "But there are a number of factors playing into the stock today. The only reason I don't have a strong buy rating on the stock right now is because I'm waiting to see the progress it has made in its new business. It's coming off an excellent quarter."
Last quarter, Sybase easily topped analysts' estimates when it posted a profit of $45.5 million, or 50 cents a share, on sales of $260.5 million.
Analysts are expecting a profit of 28 cents and $1.37 a share in the first quarter and fiscal 2001, respectively.
Sybase said the merger would dilute earnings for the second and third quarters, and that full year 2001 earnings would grow closer to the bottom of the 13 percent to 15 percent range it had earlier forecast as a result.
It still expect sales to improve 10 percent to 13 percent in fiscal 2001.
Sybase shares rallied up to a 52-week high of $31 in March before slumping to a low of $17.25 in January.
Six of the nine analysts tracking the stock rate it either a "buy" or "strong buy."