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2HRS2GO: Peregrine falls from arb action, but little else

    Conventional wisdom says the recent Nasdaq decline created buying opportunties.

    Peregrine Systems (Nasdaq: PRGN) evidently thought so. The business software company yesterday unveiled a deal to acquire Harbinger (Nasdaq: HRBC) by issuing three-quarters of a Peregrine share for every one of Harbinger's.

    Harbinger's software lets businesses buy and sell to each other electronically. Peregrine's applications manage a company's assets. It's easy to see how the businesses complement each other.

    Unfortunately for backers of the deal, Peregrine stockholders think the cost -- $43.50 per HRBC share as of yesterday's close -- is too high. Obviously, Harbinger's investors loved the 80 percent premium to their shares.

    Given that Peregrine's stock price has plummeted more than 35 percent today, you might think the company's shareholders don't think much of the deal, but I'd chalk much of the decline up to mere arbitrage, since Harbinger moved up in concert. As of early this afternoon, the deal valued Harbinger at $28.31 per share, while HRBC's stock price had risen to 27 3/8.

    So despite the seeming negativity surrounding PRGN, the market has done nothing more than played the usual balancing game that follows M&A announcements.



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    Nonetheless, you could argue Peregine overpaid for Harbinger because the latter looks like an EDI tortoise. Peregrine's revenue grew 66 percent year-over-year in the December quarter, compared to 16 percent for Harbinger. At least two brokerage firms, Prudential and Donaldson, Lufkin & Jenrette, downgraded Peregrine on news of the deal, at least partly on concerns about slower growth and a loss of strategic focus.

    (Incidentally, Prudential provides a wonderfully schizophrenic view of the deal. The company's PRGN analyst, David Breiner, said a partnership would have been better. But Prudential's HRBC guy, Paul Merenbloom, was "ecstatic" about the whole thing.)

    But though Harbinger still sees plenty of Electronic Data Interchange revenue -- amazing how quickly EDI went from being a hot technology to legacy dinosaur in the span of less than a decade -- the company does have a growing Web-related business. And when you think about it, who else was Peregrine going to buy?

    Web pure-plays like Ariba (Nasdaq: ARBA) and Commerce One (Nasdaq: CMRC) are definitely out of Peregrine's price range. Harbinger's chief peer, Sterling Commerce (NYSE: SE), already agreed to go under the wing of SBC Communications (NYSE: SBC) and probably would have cost too much for Peregrine anyway.

    I wouldn't be surprised if the Sterling deal was the catalyst that led to today's announcement. The SBC acquisition certainly stimulated a run-up in Harbinger shares, which traded in the high 30s as late as mid-March. At least Peregrine waited for a downturn.

    Breiner prefers a partnership, but I doubt that would let Peregrine and Harbinger integrate their suites fully. If you're going to push an end-to-end software line, it's a lot more convincing if you own all the parts.

    Strategic nuances can be debated. But assuming the companies can manage their corporate integrations effectively, I just don't see much downside to this deal.

    Harbinger these days is a reasonably solid business, with positive cash flow and little to no debt. It will boost Peregrine's revenue. And even critics don't believe the acquisition will dilute Peregrine's earnings despite the addition of about 36 million PRGN shares.

    The only hit comes to Peregrine's stock price, and that's just Monopoly play money in today's ever volatile Nasdaq market. Momentum traders might see it otherwise, but Peregrine probably isn't catering to them. Smart companies don't.

    Other issues:

  • Funco
  • (Nasdaq: FNCO) This acquisition involves just a fraction of the dollars being tossed around for Harbinger, but in some ways it's more interesting, because there's conflict.

    A takeover battle being waged over a relatively small bricks-and-mortar retail chain, who would have expected it? The Babbages unit of Barnes & Noble (NYSE: BKS) wants to trump Electronics Boutique (Nasdaq: ELBO) with $135 million cash for Funco, or $25 million more than ELBO's friendly offer.

    Electronics Boutique shouldn't bother trying to match it. The Riggios have much deeper pockets, and besides, the Boutique already said the main reason it signed a deal this week (as opposed to earlier) was because FNCO's stock price had dropped.

    The Babbage's offer is worth more than $22 a share, which isn't far from Funco's 52-week high of 24 5/8. And all for what? A company that largely sells used games. Electronics Boutique might better use the cash to build its Web business, or even open a few more stores and just outcompete Funco and Babbages. 22GO>