Follow-Up: MetaTools in a Merger

Even animators want synergy.

MetaTools (MTLS - Cramer's Take - Stockpickr), the subject of a Jan. 27 story in The Street, will acquire Fractal Design (FRAC - Cramer's Take - Stockpickr) in a merger valued at about $145 million in stock. The combined companies will create a computer-animation power that last year had total revenue of more than $65 million.

"I think it's a great combination," Edgar Bierdeman, an analyst with Dakin Securities, says of Tuesday's merger announcement. Dakin hasn't initiated coverage or done any underwriting for either company. "The tools and technology are complementary, the cultures are complementary and the customer base is complementary."

And, in a report issued Wednesday morning, UBS Securities analyst Michael Wallace gushed, "The most attractive part of the merger is the lack of overlap among the two product lines. The MTLS and FRAC products are almost completely complementary." Wallace also said the merger would add to earnings in 1997. UBS hasn't done any underwriting for either company.

According to MetaTools CEO John Wilczak, the merger was such a natural that it took only a month to cut. "The actual sitdown was on Friday," he says. "On Monday we made the decision to go ahead, and (Tuesday) we announced it."

But for all the gushing, Wall Street acted most unimpressed. MetaTools lost 3/8 to 14 1/8. Meanwhile, Fractal gained 2 1/4 to 10 3/8. Fractal shareholders will receive about 0.75 of a MetaTools share for each Fractal share owned.

Part of Wall Street's skepticism may stem from MetaTools' acquisition of Real Time Geometry, a real-time 3D graphics innovator, earlier this year. According to Stan Corker, an analyst at Emerald Research, Wall Street frets that MetaTools may have too much to digest with two deals in such a short span. Emerald has not done underwriting for MetaTools or Fractal.

"At first the Street is going to look at this deal a little suspiciously," Corker says. "Once people have read the analyses and done their own checks, though, there will be a change."

MetaTools makes graphics and 3D design tools, notably Bryce, a program used to create many of Hollywood's landscapes and backdrops. Fractal's flagship product is Fractal Design Painter, an illustration program. Fractal's entry-level 3D animation program, Ray Dream Studio, was rated top of its class by PC Magazine in November. It could benefit greatly from MetaTools' advanced 3D-rendering technology.

But all that whiz-bang animation stuff might confuse some on Wall Street, MetaTools admits. It's important for "people to understand what we do," laments Wilczak. "It's an education process that we're going to have to go through with the Street."

By Justin Lahart
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