Former Darlings At Bargain Prices
Opportunistic Buyers Snap Up Firms
By Cynthia L. Webb
Washington Post Staff Writer
Wednesday, May 23, 2001; Page E05

It's bargain-hunting season.

Local software companies are gobbling up troubled firms and distressed assets for pennies on the dollar compared with sky-high valuations a year ago. Some private companies, once dependent on venture capital to keep their businesses hopping, are hanging out for-sale signs in hope of staying alive now that funding has dried up.
"If you can't go public and you can't convince venture capitalists to give you money . . . can you fund the company without additional funding?" said Edward Meehan, a managing director of Legg Mason's investment banking practice in Reston. "Do you shut it down, or can you go out and merge it with somebody or sell it to somebody?"

On Monday, Washington software company AnswerLogic Inc. agreed to a buyout by a Seattle firm for about $3 million in stock. In recent weeks, a Texas company went for $2 million to Lanham-based Group 1 Software Inc. and parts of a New York company were sold to ePlus Inc. of Herndon for $1 million cash and some unregistered stock.

The recent activity may be just the beginning, analysts said. Likely targets include tech companies that have innovative assets. Companies with cool ideas but no hard assets need not apply, they add.

"There's probably more [merger and acquisition] discussion or more M&A attempts going on today, but fewer and fewer deals closing," Meehan said. "Those deals that do close can be done at much reduced valuations than . . . a year and a half ago."

Group 1 Software's cash acquisition of HotData Inc. of Austin was its second in three weeks. The $2 million price was one-twelfth the value its venture capital backers gave it only 18 months ago. In December 1999, HotData received $9 million in venture funding, which gave it a total value of $24 million, according to Mark Funston, Group 1's chief financial officer.

AnswerLogic sold itself to Primus Knowledge Solutions Inc. of Seattle for a similar discount from last year's valuation, having raised about $11.5 million in venture funding since its 1999 launch. The 45-person company, which provides software that answers queries on Web sites, cut about 40 percent of its staff in January and is being restructured. Jack Biddle, partner at Novak Biddle Venture Partners, one of AnswerLogic's venture capital backers, said the acquisition by Primus "looked like a great deal," since AnswerLogic had valuable technology but no sales channel of its own.

Primus stock has been trading around $4 a share and the company has cash and assets valued at nearly $57 million. "We're very pleased to get the equity," Biddle said. "We did fine on the deal." His firm invested $750,000 in 1999, plus $1 million as part of a $10 million round last year and an undisclosed sum in a bridge round for AnswerLogic in early 2001.

EPlus acquired most of Great River, N.Y.-based ProcureNet Inc. for $1 million in cash and nearly 423,000 shares of unregistered common stock.
"We couldn't have bought the company for $200 million last year," said Kley Parkhurst, senior vice president of corporate development at ePlus.
EPlus, which sells e-commerce management software, acquired ProcureNet's online procurement software as well as technology that allows content, such as product catalogues, to be gathered and managed online. Not included in the deal was the 100-person ProcureNet division that provides procurement services for the federal government. EPlus also got several patents, about 100 customers and about 40 employees.

EPlus needed to upgrade its procurement software, but developing it in-house would have cost more than the $5 million in cash and stock the company paid to acquire most of ProcureNet, said Phillip G. Norton, ePlus's chief executive, president and chairman.
His company, like others in this buyer's market, has a comfortable cash position. EPlus had $26 million in cash and cash equivalents at the end of last year and net income of $1.7 million on $73.7 million revenue for the three months ended Dec. 31.

EPlus started an acquisition campaign in January, sending about 75 letters to companies that looked like good targets, Parkhurst said. ProcureNet was one of them and became ePlus's fifth acquisition since it went public in 1996.
Analysts predict similar deals.

"Much of the merger and acquisition activity that you are seeing now is obviously . . . out of desperation," said Jeff Anderson, principal at Bond & Pecaro, a Washington financial consulting firm that helps communications and technology companies analyze their value.
"The longer they wait, generally the more desperate the seller becomes," Anderson said. "There are certainly some good deals out there where there's a desperate seller and there's a fit with the technology . . . that a more traditional company can pick up."

© 2001 The Washington Post Company