The writing was on the wall, large enough to be read without spectacles. Already a month ago “Globes” doubted that the merger between Sapiens and Ness Technologies would really take place. Today the two companies announced the obvious – the merger is off, due to (what else) the Sapiens share price, which has plummeted to around $2.
When the merger was announced, Sapiens had an estimated market value of $150 million, while Ness was estimated for the merger at $300 million (a 1:2 ratio). Since then, however, Sapiens has taken one blow after another: the Nasdaq’s fall combined with Sapiens’s third quarter profit warning. The result was that Sapiens dropped by two thirds since the merger was declared, completing a fall of around 90% from its peak.
The evaporation of Sapiens’s share was an evaporation in the value of Ness since the announcement. Sapiens is currently worth about $50 million, which translates into a value of $100 million for Ness. This is ostensibly a ridiculous value for a company with 2,300 employees and annual sales of $180 million. It is less than what the Wolfson family paid for the string of acquisitions that created Ness. It is also less than the private placement to Warburg Pincus in May 2000 ($45 million at a company value of $325 million).
Thus it happened that despite the compelling logic of the merger between the two computer services companies, an impossible situation was created for the Ness shareholders (Wolfson family - 50%, Warburg Pincus – 20%, executives and employees – 25%, Gmul Investments – 5%). The question was simple – how can the merger be implemented at such a low value, with a company undergoing a minor crisis?
The problem became more acute when Sapiens published its profit warning. It is not clear to us whether Ness was aware of what was going on in Sapiens, but judging by the answers given by Ness CEO Yaron Polak to “Globes” a month ago, it appears that the company was somewhat surprised. “We had a general picture,” Polak said at the time, adding, “If it turns out that some of the basic information was incorrect at the time of the merger, then there is a solid basis for not approving it.” Indeed, the merger was not approved.
Sapiens apparently did not deliver the goods for Ness, as evidenced by the price of its shares, their negotiability, and penetration of the European market. The profit warning particularly related to this market, following which Sapiens reported a $7 million loss in the third quarter. Ness certainly had the option of entering Nasdaq through the back door, but at what price? At $2?
Don’t get us wrong; you can’t blame Sapiens for everything. Its reports were at least public, in contrast to those of Ness. Sapiens CEO Dan Falk said in the past that one of the reasons for the share’s plunge was that Sapiens’s shareholders are simply unfamiliar with Ness. Well, that was supposed to have been cleared up in the merger process, but now it won’t happen.
In any case, what’s past is gone. What about the future? After the merger attempts, both parties will have to pick up the pieces. They wasted time, money, and energy on their unsuccessful attempt, and will have to move on.
What is in store for Sapiens? The Oppenheimer investment house assessed that the merger with Ness constituted a last-ditch lifeline for Sapiens. Now the lifeline is gone, and Sapiens will have to deal with its lack of manpower (which Ness was supposed to solve) and faulty pricing of projects (according to Oppenheimer). When the third quarter financial reports were published, Falk said that the results would improve, but Oppenheimer says it won’t be so easy. “In addition to the euro’s weakness,” Oppenheimer wrote, “Sapiens announced it had not succeeded in closing a number of deals, whose contribution to the company’s revenues was critical. This is not a positive sign, especially combined with the lack of manpower declared by the company in the second quarter, which makes it difficult to advance projects according to plan and prevents the company from seeing planned revenues.
”It should be kept in mind that Sapiens has only modest cash reserves ($23 million), a fact aggravating the company’s situation still further and stressing the need for a merger with Ness Technologies.”
From a personal viewpoint, what happened to Daniel Falk should be noted. Falk was deputy finances manager in Orbotech, one of the most successful and healthy Israeli companies. He was apparently seeking a challenge and found the CEO chair in Sapiens. It now appears, however, that he has landed in a considerable fix – not a pleasant affair.
What will happen with Ness? The shareholders will continue searching for their exit. What possibilities do they have? A Nasdaq issue looks like an exercise in masochism. How about another merger? We’ll have to wait and see.
Published by Israel's Business Arena on November 15, 2000