M & A Roundup: Merger-Makers Stumble In Selling New-Age Deal Formats: Investors Are Slow to Accept Complex StructuresTailored for the Special Needs of Tech Firms

Get used to it. As technologies – and the companies that manage them – grow more complex and high-tech acquisitions proliferate, many m&a deal structures are matching them for sheer exoticism. While straight-up cash purchases and share swaps continue to be the mainstays of m&a, they are increasingly being augmented by novel formats devised to marry the demands of stock market arbitrage and tax engineering with the pressures of competitive positioning in the ceaselessly volatile technology sectors. Two highly controversial multibillion-dollar transactions uncorked in March underscore the drive toward off-the-wall dealmaking. In one, TriZetto Group Inc., an Internet-based provider of health care information not much past the startup stage, agreed to acquire IMS Health Inc., the venerable bible of pharmaceutical and health care information through traditional media. In an even more bewilderingly complex arrangement, disk-drive leader Seagate Technology Inc. is going private through a combination acquisition, LBO, and breakup valued at $20 billion. Initial reactions demonstrated that new-age m&a architecture would have to be considered an acquired taste. Dealmakers plugged the “good story” behind their transactions but jolted investors and analysts gave them few points for daring. Criticisms abounded. Stock prices dropped – in the case of TriZetto and IMS, driving the deal value down from an initial $8.3 billion to less than $5 billion. And there were concerns, not altogether misplaced, that the deals were so intricate that the partners could wind up shooting themselves in the foot. Take the case of the arbitrage-driven TriZetto/IMS combination. Strategically, the deal was billed as a way of propelling IMS onto the Internet while giving TriZetto an overnight boost in content. Financially, the deal leveraged tiny TriZetto’s richer, Internet-influenced stock price to cast it as the nominal acquirer. As a sweetener, the combined firm will subdivide, issuing tracking stocks for the IMS information business and TriZetto services and portal operations and spinning off a pharmaceutical relationship management business as Security Technologies. Strip away all the wrinkles and this is a simple reverse takeover with IMS shareholders slated to own 85% of the combined firm. That puts a huge goodwill monkey on the resulting company’s back, which may have been responsible for the stock plunge. As far as the accountants are concerned, IMS is the real acquirer. Thus, acquisition goodwill, which must be written off over time as a hit against earnings, is calculated on the difference between the ultimate purchase and TriZetto’s low book value. “There is no doubt that IMS is the acquirer,” said Robert Willens, senior VP and tax expert at Lehman Brothers. “The goodwill is based on TriZetto’s book value, and there is no goodwill advantage. The earnings may be obliterated by the goodwill write-offs.” Willens said a similar overhang plagues the America Online Inc. acquisition of Time Warner Inc. in which goodwill will be based on AOL’s book value. Seagate’s multi-layered exercise grew out of a desire to deal with several problems in one swoop. Seagate enjoys leadership in computer disk drives but its stock price has suffered because the storage-device industry has lost favor with investors, who deem it a mature, commoditized, and intensely competitive niche in the information technology sector. Meanwhile, Seagate was sitting on a phenomenally appreciated stake in VERITAS Software, a storage management software firm, which issued the stock when it acquired Seagate’s software business. The value of the VERITAS shares was estimated at about $18 billion at deal announcement, or greater than the total value that the stock market accorded Seagate. Wrestling with a huge tax problem Taxes were at the root of Seagate’s dilemma. Had Seagate simply distributed the VERITAS stake to its shareholders, they would have to pay a stiff tax – estimated at $7 billion by Willens. The tax-free end run involves VERITAS acquiring Seagate for stock valued roughly at $18 billion, retiring the Seagate holding, and effectively converting Seagate holders into VERITAS owners. And just before that deal goes through, Seagate will sell its core disk-drive business to an investment group including buyout firms Silver Lake Partners and Texas Pacific Group and Seagate management. The $2 billion proceeds also will be split among Seagate shareholders. Commenting on the privatization, Seagate CEO Steve Luzco pointed up the price that public companies pay in trying to advance their businesses and simultaneously please investors quarter by quarter: “…Becoming a private company,” he said, “will allow us to focus on strengthening our core business. We believe that given our financial partners’ long-term view, we will have greater flexibility to meet these operating and strategic objectives and our employees will have a broad opportunity to participate in startup equity ownership.” Controversial as they were, these formats may be replicated in future tech acquisitions. Given the huge multiples and rich prices for stocks of relatively young technology and Internet-related companies, reverse transactions like TriZetto/IMS and AOL/Time Warner could become more common if the partners are willing to hack the goodwill overhang. Seagate’s method for existing the VERITAS investment may very well be a prototype for a growing number of firms facing a tax dilemma in exiting with a highly appreciated stake in another corporation. Such interests are proliferating as established operating companies expand venture capital or minority investments in young, developing organizations and increasingly take stock from buyers of their divested business.