Lawson-Intentia Merger Enters Round Three with U.S. Regulators
March 6, 2006 Alex Woodie
Lawson Software re-filed a key document with the U.S. Securities and Exchange Commission in mid-February regarding its planned merger with Intentia International. If the SEC gives its nod of approval, which could occur in the next few weeks, the companies would be free to complete their union. However, if the SEC does not approve the document and requires a fourth go-around, the companies could miss their April 30 deadline to complete the merger.
Lawson and Intentia, two ERP software developers with strong OS/400 products and presence and similar Java re-development strategies, first unveiled plans to merge last June. The merger had originally been slated to be a done deal by the end of 2005. However, difficulties in reconciling the two public companies’ books and getting the SEC to sign off on the registration and proxy statement, called an S-4, led the companies to delay their initial deadline.
The S-4 is basically a copy of the prospectus that the companies will show its shareholders in reference to the merger with Intentia, and details the plans of the merger, laying out risks and many other aspects. A key element of the S-4 is a reconciliation of the two companies’ accounting figures to show how the two companies’ books would look if they had operated as a single company. Lawson first filed an S-4 on November 21, 2005, but it didn’t satisfy the SEC, so it filed an amended S-4 on January 23, 2006. On February 22, the company re-filed its amended S-4. This back-and-forth is normal with S-4s.
The problems with getting the SEC to sign off on the S-4 statement stems, in large part, from the different languages, currencies, and accounting standards the two companies use. Lawson is based in St. Paul, Minnesota, uses the American dollar, and abides by GAAP accounting standards, while Intentia is based in Sweden, uses the Swedish Kronor, and keeps its books according to Swedish GAAP standards.
In the amended S-4, Lawson describes some of the difficulties it’s faced reconciling the books. “Because of the differences between Swedish GAAP and U.S. GAAP including, for example, differences in software revenue recognition, Intentia’s historical financial results under U.S. GAAP will show material differences for each of the respective periods presented as compared to Swedish GAAP,” the document states. Differences in how U.S. and Swedish GAAP account for R&D expenses, goodwill, leases, taxes, convertible notes, and other items were also a key in the recent February 22 re-factoring. In the end analysis, the impact of applying U.S. GAAP is that all major revenue streams, including license revenues, implementation services, and maintenance services, are typically recognized later under U.S. GAAP than under Swedish GAAP, the S-4 states.
According to the most recent S-4–a massive 425-page document that insomniacs and other interested parties can read in PDF format here–the differences in U.S. and Swedish GAAP did have a pretty substantial difference on Intentia’s reported net income for 2003, and, to a lesser extent, 2004.
For 2003, according to Swedish GAAP, Intentia recorded a net loss of about 411 million Sweden Kronor (SEK), or about $52 million at current exchange rates. When Intentia’s books are kept in accordance with U.S. GAAP, that loss blossomed to about SEK 797 million, or about $101 million. For fiscal year 2004, Intentia reported a net loss of about SEK 354 million according to Swedish GAAP. When those numbers are rectified in U.S. GAAP, that loss actually narrows to about SEK 316 million.
The change to U.S. GAAP also had a substantial impact on total Intentia shareholder equity. According to the S-4, the change to U.S. GAAP increased the value of the company in 2003 from about SEK 831 million to SEK 1,693 million, and in 2004 from about SEK 937 million to SEK 1,542 million.
Intentia was not required to reconcile its fiscal year 2005 results into U.S. GAAP. The company started its fiscal year, which began January 1, 2005, by switching to International Financial Reporting Standards (IFRS) accounting practices.
Intentia also reported its 2005 results last week. Revenue was practically unchanged from 2004 at SEK 2,982 million, but the bottom line was improved with the delivery of only a SEK 29 million loss. That change was the result of a 12 percent increase in software license revenue and a 16 percent reduction in costs, mostly attributable to reductions in professional services organization (the company laid off close to 300 people in professional services). Although development costs were higher in 2005 than the year before, Intentia expects to save lots of money here in the future, as it’s in the middle of transferring about 100 developer and support jobs to outsourcers in India.
Despite the accounting obstacles, the two companies are committed to the merger. In a conference call last week following disclosure of 2005’s results, Intentia CEO Bertrand Sciard said “….[I]t is up to the SEC to decide when they are going to get back to us. Normally, it is within two or three weeks, but we don’t know. This is in their hands. If they come back with questions then we have to answer. If they don’t come back with questions then it will become effective.”