IDION Takeover May Be Tough for DataMirror

by Timothy Prickett Morgan

Last Monday, DataMirror amended some of the comments it had made in its March 18 announcement that said it had made an offer to IDION directors for the company and that it had been refused. The offer, it seems, never made it from DataMirror to IDION, because of an administrative oversight on the part of DataMirror. What did happen, says DataMirror now, is that the top brass of the two companies met on March 16 but that no formal offer was made, and therefore there was no rejection of an offer, as the initial press release stated. This, as you may imagine, perturbed the management of IDION, which is unfortunate for DataMirror, considering that IDION's management held about 40 percent of IDION's shares before the hostiletakeover was announced. If human nature is consistent, IDION's management is buying up as many shares as they can afford right now to bolster their stakes in the company, whose shares have risen by nearly 50 percent since the deal was announced. At press time, IDION shares were trading at 90 cents South African rand, meaning that IDION has a market capitalization of about $10 million. With DataMirror owning 16.4 percent of the company already--presumably, DataMirror bought IDION shares late last year when they were cheap--it would have to come up with another $8.6 million to buy all of IDION's shares.

DataMirror will not, however, need all of the shares to acquire IDION. All that it needs is 50 percent of the shares plus one share, according to David Wegman, executive vice president of marketing and development at Vision Solutions. That's basically $5 million. However, IDION's management team has at least 40 percent--and I think it will have more than that if it can find shareholders who want to sell--and its largest investor, a South African venture capitalist named Coronation, has another 11 percent. Sunil Shah, who runs Coronation, called the proposal "ludicrous" and said that IDION was valued more in the range of $30 million, and that, given the multiples that software companies often get, twice this amount was also something that made sense. Of course, Shah has his own motives for saying that--mainly that he is holding shares in a company that has seen its share price hammered in the South African high-tech market, which was down 90 percent last year, according to Wegman. When you factor in the devaluation of the South African rand against the U.S. dollar--which was trading at 7 rand to the dollar last year, and which is now in the range of 11 rand per dollar--buying IDION is extremely attractive.

According to Wegman, who says that IDION received the formal offer from DataMirror last week, the deal is well under the current value of the shares and is "highly conditional." He echoed the statements of Corne Arnold, IDION's executive director. "We didn't go into this year to be bought, and it isn't in our plan to be bought," he said last week. "We have a responsibility to our shareholders to evaluate any real offer, and we are scratching our heads, trying to figure out if this makes sense to our shareholders." The $6.2 million offer obviously doesn't, not with the current trading range for IDION's shares. If DataMirror wants IDION, it will have to pay some sort of premium. Exactly what that premium could be is unclear, but, according to Wegman, it does have a ceiling. He said that, according to securities law in both Canada and South Africa, any company making an acquisition or being acquired has to make an acquisition with unencumbered cash. That would imply that DataMirror has to acquire IDION with cash on hand, not through the issuance of new stock and not through borrowed money. At the end of January, DataMirror had approximately $23 million in cash and equivalent short-term investments on hand.

The hostile-takeover offer remains in effect until April 19. It is hard to imagine that the shareholders would take it, unless they believed that IDION shares would never return to the levels they enjoyed in the last two years. IDION has appointed an independent executive committee to review the offer, and has retained PricewaterhouseCoopers to provide advice on the deal. It was unclear at press time what DataMirror could do to up its offer, but if the company comes close to closing the deal, it can apparently ask for an extension from the South African securities authorities.

If DataMirror really wanted to acquire IDION, it should have launched the hostile takeover at the end of last year, when IDION shares were trading in the range of 30 cents rand. Back then, an offer of 65 cents South African rand would have looked pretty good. It seems likely that DataMirror is going to have to pony up a lot more money than that to get Coronation and at least some of IDION's management shareholders on board. And, as I said last week, IDION, having paid $62.5 million in cash in March 2000 to acquire Vision Solutions, is probably not going to want to sell out so easily. If IDION's management is inclined to sell--and they have all been careful not to say whether or not they are--they would do well to solicit other buyers, to help drive up the price. An offer of $6.2 million for a company with $4 million in cash and a revenue stream running at well over $20 million is indeed ludicrous. DataMirror knows this, and it will be interesting to see if it revises its offer, to actually close the deal, or merely steps back and enjoys the chaos it has created for its rival by showing the world how far IDION's stock price has fallen and how easy a prey it is to a takeover.