Shareholders of CDC Corp and Onyx Software Corp still seem skeptical about where the value lies in the CDC’s attempt to buy a majority stake in Onyx, following a conference call Friday in which CDC laid out its plans.
The web conference revealed one significant reason why CDC is aggressively pursuing the CRM software vendor and why it is going in with a complicated proposal instead of a conventional outright acquisition.
What we are trying to do is figure out a way to unlock shareholder value. We feel our price is undervalued, said acting CEO Steven Chan. He said that CDC believes that injecting a cash component into a publicly traded company will help unlock that value.
By proposing a deal whereby it transfers its enterprise software assets to publicly traded Onyx and injects additional cash to boost the overall value of the company, CDC is effectively hoping for the benefits of an IPO without the associated costs and delays.
Enterprise applications developer CDC represents one part of the overall business, the mobile and services-oriented China.com Inc the other.
In effect, the Onyx deal would enable CDC to spin out the enterprise applications part of its business without the pain of an IPO, while also increasing its valuation and its stock price because of the Onyx component.
Onyx has given CDC short shrift and its board has formally rejected the offer.
I think the real value is for the CDC shareholders, said Onyx CEO Janice Anderson.
The feeling from Onyx shareholders was that the deal is overly complicated, and that they might prefer a simpler and more conventional cash-for-shares acquisition, instead of a bid that offers all CDC’s enterprise software assets and $50m in exchange for a 75% stake.
We see the benefit to CDC shareholders but not the benefit to Onyx shareholders, one Onyx shareholder said during the web cast Friday.
In an interview with ComputerWire, Onyx’s Anderson said one of the several reasons the company rejected the proposal was that it failed to provide cash for the shareholders and would have diluted control for no added value.
When you look at their proposition, they want to offer us their software divisions’ assets at our multiple. Ours is around nine, theirs is [in the range of] four to six, she said. That is a 50% premium.
The Onyx board also believes it has turned the corner financially and can offer shareholders greater value by continuing with its existing strategy of organic growth based on BPM-oriented CRM and targeted fill-in acquisitions and OEM deals.
One CDC shareholder also questioned the value to CDC shareholders, saying he could see how Onyx shareholders would benefit from the deal but not where the value was for the CDC stockholding community. Onyx would increase CDC’s size by a quarter but Onyx would be made four times larger, he said.
You can create shareholder value better with another approach, he said.
In response, CDC’s Chan said it was important to look at the proposed deal as one of a series of potential deals, indicating that the company is considering doing something similar, looking for complementary software products in other areas the enterprise software sector.
We feel it is a win-win if people have long-term vision, said Chan, stressing that the combined entity would have size, scale and be well capitalized.
Anderson countered this assertion, challenging the bigger is better strategy and CDC’s ability to perform.
I don’t think it is as simple as be large or the game is over. They [CDC] are large but they are losing money. The reality is that there are many different success strategy and many different weak ones, she said. She added that CDC had not proved itself successful in managing its Pivotal acquisition, which is its nearest comparable asset to Onyx.
Pivotal grew by 4% in terms of license revenue over the past nine months, whereas Onyx saw a 31% improvement. When CDC’s whole business is considered, its license sales were three times that of Onyx over the same period, although that includes both the small enterprise applications side of the business and the larger mobile services proportion.
CDC repeatedly said that it is flexible about the deal and might consider simplifying the structure, but despite being questioned did not provide details about what form it might take, saying it would prefer to discuss the issue with Onyx first.
However, Anderson said she had asked what alternatives CDC could come up with during a telephone call to discuss the issue with CDC on December 30, but the company did not put anything on the table and failed to provide a direct answer when asked if it would propose a cash transaction.
Nor was it clear about the detailed finances of the current proposal she said. When asked about the $50m infusion, such as whether it would be at the disposal of Onyx or would be used by the complete entity, and why it was not being offered to shareholders, she said there were no satisfactory answers.
You cannot assess a proposal that has no numbers, said Anderson.
As far as CDC is concerned, executives are frustrated by what they sees as Onyx’s failure to engage.
We are frustrated and disappointed by the process Onyx had used to evaluate the proposal, said Chan, which he said was a single 30 minute phone call with the Onyx CEO on 30 December. No other board member attended and the CEO sad we should contact her via email.
Onyx said the proposal had been reviewed by a special committee that included four independent board members.
The dismissive behaviour is surprising and unusual, said Chan, adding how much can you discuss during a 30 minute phone call.