In early July, when the initial acquisition agreement of Scorpio by US Robotics was signed, in return for $80 million in shares, the price of US Robotics shares stood at $90. Since then, the US modem-makers’ share has plunged by almost 50% to $48, and Scorpio shareholders knew something was going to have to change. The original agreement contained mechanisms to enable change, in the event of a significant drop.
The deal which will close in two weeks, will differ from the original agreement, and it is not yet certain that the new deal is not preferable to Scorpio’s owners. Instead of $80 million in US Robotics shares, the US company will pay $72 million cash. The terms of the new deal were not determined in advance, but resulted from renewed negotiations after the share crash. It appears that both sides preferred to close the deal in return for shares, not cash.
It was easier for US Robotics’ management to dilute shareholders when the share was trading at a peak $90-100, instead of after a 50% drop. When the deal was signed, the shares slated for Scorpio’s owners represented 1% of US Robotics capital share. It seems that now, considering all aspects of earnings per share, a 2% dilution was too much.
The cash payment proves that the acquisition was important to US Robotics. A payment in shares is far easier for a company, and $72 million is a large sum for US Robotics, whose shareholders equity at the end of June 1996 was $650 million. However, as opposed to most large high tech firms, most of US Robotics’ shareholders equity was backed with cash, and the company had large amounts of receivables and inventory. Cash balances reached $115 million, so the $72 million payment to Scorpio is a good chunk of these funds.
Scorpio’s owners are undoubtedly pleased with the new arrangement. As compared with shares, which would have borne a 40 day cap, the cash will be transferred immediately and they will not be exposed to continued fluctuations in the share price.