Date: 2008

Author: Morten Løfsnæs, Nordic Regional Director – Corum Group International

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

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

Unfortunately, the synergies and the increased cash 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 for the 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 of the acquisition had to leave early in 2007. In addition to this, Tandberg was put in a very difficult financial situation. Part of the financial package puttogether for the acquisition needs to be renewed. Under the current circumstances this could be a challenge.

So, what went wrong? What has brought a company like Tandberg Data to the brink of bankruptcy? First of all: Tandberg Data has been loosing money for years. The acquisition of Excabyte seems to have been a desperate attempt by the management to “do something”. But they did not have the ability to merge the two companies in an efficient way, and Excabyte became an extra burden rather than an asset. The Tandberg Data management team could not have done the due diligence in a prudent way and the synergies never unfolded. Revenue expectations were not met and as a result, the deal could end with a tragedy.

A version of this article originally appeared in Soft•letter andSoftware Success.