NetManage and Rocket Software Call Off Acquisition Deal

March 17, 2008 Timothy Prickett Morgan

It is a story that is playing out in every industry these days. The credit crunch on the world’s financial markets, caused by the American housing bubble popping and the consequent unraveling of the mortgage-backed securities that were making many of the big private equity firms flush with cash, has made it hard for companies to buy their way into new businesses. And so it seems to be with Rocket Software and its $69 million acquisition of host connectivity and application modernization software maker NetManage.

Rocket Software, based in Newton, Massachusetts, is a privately held maker of utility software for mainframes that has been in business for nearly two decades and that has been on an acquisition tear for the past few years to broaden and balance its software portfolio. The company’s key product is a hierarchical management program for mainframes called Mainstar, but another important product line comes from Seagull Software, which Rocket Software acquired in December 2006 for $55.7 million. The company sells a number of products on an OEM basis to Hewlett-Packard, EMC, and CA, which probably provides Rocket Software with a nice revenue stream–you can’t tell because the company is private and does not publish its financial results. (CA and Rocket Software are currently involved in a lawsuit after CA alleged that Rocket Software had incorporated some of CA’s intellectual property in Rocket’s programs.) In January, only a few weeks after announcing its takeover deal for NetManage, Rocket Software picked up the assets of a storage lifecycle management software maker Arkivio, which it will probably meld with its existing mainframe archiving products, called ServerGraph. In May of 2007, the company also bought a maker of business intelligence and performance management software called CorVu for $20 million.

Rocket Software announced the NetManage deal on December 12, 2007, and completed its due diligence for the NetManage acquisition on January 22, 2008. When NetManage, which is a publicly traded company, announced its fourth quarter financial results in the middle of February, the company said that it had extended its acquisition agreement deadline to February 29 to give Rocket Software more time to raise the cash it needed to do the $69 million deal. Rocket Software never did say how much money it needed to raise and how much of its own cash it had to close the deal, but clearly it did not happen.

“Although we are disappointed that Rocket was unable to secure the necessary financing to complete our plan of merger, NetManage has remained focused on running its business and providing the best solutions to our customers while driving revenue growth and improving profitability,” said Zvi Alon, NetManage’s president, chief executive officer, and chairman, in a statement. “I continue to be excited about the opportunities ahead for us as a standalone company and the strong pipeline of new business prospects and product developments in the future.”

For the fourth quarter of 2007, NetManage booked $10.9 million in sales, up 27 percent compared to the fourth quarter of 2006, with net earnings of $1.7 million (17 cents per share), much better than the $916,000 loss from the year-ago quarter. For the full year, NetManage’s sales were up 1.4 percent to $36.1 million; the company had a net loss of $1.3 million, but cost cutting actions taken by management were getting traction in the second half of 2007. NetManage ended 2007 with $25.4 million in cash, which means the $69 million deal by Rocket Software to take over NetManage really came to a $43.6 million acquisition deal as of the beginning of 2008. As we go to press on Friday, NetManage’s shares have collapsed from their $7 peak after the Rocket Software deal was announced to $4 a share, giving NetManage a market capitalization of $37 million. Basically, NetManage is worth what it was prior to the offer from Rocket Software, but it appears to be in better financial shape. Which probably means a software company that has its own cash might come sniffing around for an acquisition deal.

This is not, of course, the first buyout offer that NetManage has had in recent years. In the wake of the takeover and merger of Attachmate and WRQ a few years back, two companies with a combined 15 percent stake in NetManage–Riley Investment Management and Zeff Capital Partners–offered to pay $42 million to buy the remaining 85 percent of NetManage’s shares that they didn’t control. That was September 2006, and in November, after NetManage’s management said no dice to the deal, the private equity firms added $2 million to the price. At the time, NetManage had a market capitalization of $47 million and over $28.1 million in cash, and NetManage said no thanks.

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