Yes, There Are Bad Software Company Deals

I was recently asked what was the worst deal Ihave seen lately. In August 2006, the Norwegian tape storage company TandbergData acquired U.S.-based Excabyte Corporation for $28 million. The acquisitionwas financed by loans. At first this looked like a good deal, as Excabyte waspriced at approximately 0.5 times revenue. But as the situation unfolded, itappeared that Tandberg bought a can of worms. Excabyte had been struggling foryears in a shrinking market and had built up a lot of debt.

Tandberg’s reason for acquiring Excabyte wasthat they wanted to grow into new markets, the two companies had complementaryproducts, and that cost synergies could be as much as $10 million. When theacquisition was announced, the two companies combined were expecting revenue of$215 million in 2006.

Unfortunately, the synergies and the increasedcash flow, which were meant to pay for the loans, did not materialize. As ofthe third quarter of 2007, the combined revenue was $144 million. The EBIT forthe same period reached $8 million.

Tandberg’s share price had been reduced by 75%and the shareholders were quite upset, to say the least. The CEO at the time ofthe acquisition had to leave early in 2007. In addition to this, Tandberg wasput in a very difficult financial situation. Part of the financial package puttogether for the acquisition needs to be renewed. Under the currentcircumstances this could be a challenge.

So, what went wrong? What has brought a companylike Tandberg Data to the brink of bankruptcy? First of all: Tandberg Data hasbeen loosing money for years. The acquisition of Excabyte seems to have been adesperate attempt by the management to “do something”. But they did not havethe ability to merge the two companies in an efficient way, and Excabyte becamean extra burden rather than an asset. The Tandberg Data management team couldnot have done the due diligence in a prudent way and the synergies neverunfolded. Revenue expectations were not met and as a result, the deal could endwith a tragedy.