JDA Software Takes Another Run at i2 Technologies

Published: November 9, 2009

by Timothy Prickett Morgan

No, you are not having flashbacks, but retail and supply chain software vendor JDA Software said last Thursday that it was acquiring sometimes rival i2 Technologies for what works out to around $396 million. This is the second time that JDA has tried to acquire i2, and ironically, given the weakened state of the global economy, this is a lot more money than JDA was willing to pay in August 2008 when it made its first offer.

Back then, JDA sought to acquire i2, one of the innovators in the supply chain management software market, to bolster its presence in discrete manufacturing, and was willing to pay $346 million for the company. It has always been somewhat of a mystery that the other big player in supply chains, Manugistics, which has its expertise in process manufacturing, didn't merge a long time ago. JDA bought Manugistics in the summer of 2006 for $213 million in cash, basically pre-empting such a deal.

Anyway, in the summer of 2008, when the economy was weakening but had not yet turned into the economic meltdown we all know and detest, it looked like JDA would be the catalyst to finally bring these two supply chainers together. But the meltdown hit, and i2 canceled the merger agreement because JDA was unable to raise the $450 million in funding it wanted to raise to do the deal, which looked pricey as i2's stock and, indeed all stocks, took a dive once the banks started to fail last September. And so i2 got a $20 million termination fee and both companies battened down the hatches to try to navigate the economic meltdown separately.

But last week, JDA had another go at i2, and said it still wants to create a retail and supply chain giant with an addressable market of 38,500 customers. That's around 4,500 retailers and distributors that might use JDA's software, 17,000 process manufacturers who could use Manugistics' supply chain code, and another 17,000 discrete that could use i2's supply chain code. All told, the combined companies had around 6,000 in the summer of 2008, and that number has not changed appreciably in a little more than a year. JDA said last week it had 5,900 customers and i2 had 400 customers, with more than 6,270 total customers once you shake the common ones out. As you can see, about 130 i2 customers seem to already have JDA software. But JDA reckons that the combined firms have only 16 percent of its addressable market, and there is room for growth in the market at large.

"Our strategic rationale for acquiring i2 is even more compelling today than it was a year ago," explained Hamish Brewer, JDA's chief executive officer in announcing the second time around on the i2 acquisition. "The challenges of the economic crisis have focused the market's attention on the disciplines of supply chain planning and JDA has established a leading role in this active market. Integrating i2's solutions and expertise will only expand our opportunity to build substantial new shareholder value over the coming years."

The combined JDA and i2 companies had a $616.7 million in sales for the trailing 12 months through the end of September, with $147.2 million coming from software sales, $253.2 million coming from maintenance, and $216.3 million coming from other services. JDA has not been particularly profitable in the past 12 months, with only $4.3 million in net income, but i2 has brought $45.8 million to the bottom line, giving the combined company $50.1 million in profits; the combined firms threw off $99.4 million in cash from operations, which is not bad at all. The combined companies will have just under 3,000 employees.

JDA's top brass said in a conference call with Wall Street analysts on Thursday that JDA had some 1,800 partners and its 5,900 customers are located in 60 countries. About 70 percent of sales come from the United States, with 20 percent coming from Asia, and the remainder coming from Asia. Depending on the quarter, between 60 percent and 70 percent of JDA's license revenues come from existing accounts--look at that cross-selling--and that nearly half of JDA's revenues each quarter are recurring from maintenance and services. The company boasts a maintenance retention rate that is above 90 percent, too. i2 is bringing a "significant backlog in all revenue segments" and a slightly higher concentration of business in Asia (about 24 percent of total revenues) and a little bit lower in the Americas (about 57 percent). The company also has some of the largest and most complex supply chains in the world as customers, with 19 of the top 25 supply chains (as ranked by AMR Research being run by i2 code. JDA does a lot of coding in Hyderabad, India, and i2 does a lot of its coding in Bangalore, and these two sites will stay operational after the deal is done.

The i2 acquisition deal is a bit complicated, and this time around, JDA has two different ways to close the deal just in case one way fails. JDA has agreed to pay $18 a share for i2's common stock, which is a 9 percent premium over the closing price last Wednesday, the day before the deal was announced. That works out to $434.4 million. JDA is also going to retire i2's Series B convertible preferred stock, which costs another $121.7 million. i2 has $160 million cash on hand, however, which makes the net cost of the deal work out to $396.1 million. To buy up the common stock, JDA intends to use some of the $85.5 million in cash it has on hand, plus selling $275 million in unsecured senior notes. JDA agrees to pay $12 a share for each i2 share plus give each i2 shareholder 0.256 shares of newly issued JDA common stock, worth $6 at the time the deal was announced. If the fundraising doesn't work, then JDA will fork over $6 per i2 share and give up 0.58 shares of JDA stock for every i2 share, worth $12 a pop. Wells Fargo will underwrite a $120 million loan and a $20 million revolving line of credit to make this alternative deal work. By the way, the Series B convertible preferred stock for i2 is worth $1,100 per share, plus any unpaid dividends. JDA reckons that the deal will cost somewhere around $32 million to $35 million in financing, lawyer, and investment banker fees.

If JDA terminates the acquisition deal, it has to fork over $15 million to i2; if JDA shareholders spike the deal, JDA has to pay i2 $7 million; and if JDA doesn't close the financing for either scenario but would otherwise go ahead with the deal, it has to shell out $30 million to i2. JDA has until December 18 to sell its $275 million in notes.

JDA said in a conference call with Wall Street analysts that it expected the acquisition of i2 to close in the first quarter of 2010 and that the company would be accretive to earnings on a non-GAAP basis in 2010, including an expected $20 million or so of "net operating synergies," which means eliminations in the back office, in sales and marketing, and the closing of certain offices and other facilities, as well as the elimination of a lot of legal and accounting fees that each company is paying because they are publicly traded.

Separate from the i2 acquisition, JDA confirmed its guidance for 2009, saying that software license sales would come in at between $86 million and $90 million for the year, and total revenues would be in the range of $378 million to $385 million. Earnings per share are expected to come in at $1.57 to $1.59, but you all know how I feel about EPS. Show me the net earnings. Wall Street could learn a thing or two about looking at real earnings.

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