JDA and i2 Call the Whole Thing Off

Published: December 8, 2008

by Timothy Prickett Morgan

Only a little over a month ago, retail and supply chain management software maker JDA Software was pretty proud of the fact that its business managed to grow in the third quarter, hitting record profit and sales levels, and was looking ahead to boosting its business through its impending $346 million acquisition of i2 Technologies.

What a difference an economic meltdown makes in a company's life. i2 announced last week that it had terminated the acquisition agreement with JDA because the latter company was finding it difficult to raise the $450 million in cash it wanted to get from Credit Suisse and Wachovia to do the deal. JDA did not give consent for any of the details in the financial wranglings to be made public, so i2 cannot say much about what happened, but i2 did say that it expected to get a $20 million termination fee from JDA.

JDA had already acquired Manugistics in 2006, giving it expertise in supply chain operations for process manufacturers, and i2 was to be the expertise JDA wanted for discrete manufacturers. The combination of the three companies--JDA for retail and wholesale operations, plus Manugistics and i2--would have created a company with 38,500 customers, an annual revenue stream of about $635 million a year, and an operating profit of about $150 million. Given the state of the American stock market and very tight credit conditions the world, it is safe to say that the i2 deal could not be done at the striking price back on August 10, before the economy went south. (Well, more south.) JDA wanted to redo the deal at a lower price, and i2, whose shares were still trading near the striking price for the past several months but were 35 percent below the striking price on November 6, when the deal was to close, somehow expected JDA to think this was an acceptable premium to pay for the company in these tough times.

Based on a 30-day average prior to when the deal was announced back in August, JDA was already paying a 12.2 percent premium at the $14.86 per share price. As we go to press on Friday, i2's shares are trading at $6.27 a share, and the August price for the deal now looks like a factor of 2.4 over i2's market capitalization, which stands at $136.8 million. i2 reported its third quarter financial results on November 14, with sales down 3 percent to $64.8 million and net income down 57.8 percent to $1.9 million, and still it didn't feel compelled to renegotiate the deal. And it is not hard to see why, with the company having $227.8 million in cash in the bank.

Basically, Wall Street thinks i2 is worth less than the cash it has on hand. Which is crazy. i2 is a good company with lots of expertise, and if anything, this just points out the folly of valuations of companies by those of us who buy and sell company stocks.

Anyway, i2's chief executive officer, Pallab Chatterjee, tried to put the best face on the situation. "In these difficult economic times, supply chain management is crucial to efficient business operations," Chatterjee explained in a short statement the company put out. "So today, more than ever, businesses need the technology and expertise of i2. We are singularly focused on developing innovative solutions and delivering value to our customers worldwide."

It would not be at all surprising to see i2 make some sort of deal or partnership arrangement with another midrange software company, International Business Systems of Sweden. You see, Chatterjee is chairman of the board of that recently restructured company, which has just decided to push its Java-based ERP software on Windows boxes aggressively to try to expand its presence in the midrange. (See IBS Picks Windows Instead of i as Strategic ERP Platform.)

It seems very unlikely that someone will come in and pay the kind of price JDA was willing to do--and would have been able to easily do with better credit markets--back in August. And i2's management has made it pretty clear that they want more of a premium than the company's current share price justifies. Someone, like Oracle for instance, could now come in and do a hostile takeover of the company, perhaps offering $8 or $9 a share, and maybe even has high as $10 a pop. IBM might even be interested in the company, given all the cash it has. Maybe Hewlett-Packard and SAP, too. And, of course, there's always Microsoft.

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