Peregrine's Remedy Might Well Be Worth Its Price

Sure, it's quite a premium, but the software company is getting a fair amount for its money.
By Joe Bousquin ,

It only looks expensive.

Traders had to rub the presummer haze out of their eyes this morning when

Peregrine Systems

(PRGN)

announced its $1.08 billion deal to acquire

Remedy

( RMDY), a rival software firm that makes help-desk applications for smaller businesses.

The absolute size of the deal was jarring enough, given the fate of failed deals at

Ariba

and

FreeMarkets

, and the fact that the market is entering the summer doldrums. That the price put a 91% premium on Remedy's shares from its Friday close was another matter altogether.

"I think there was an initial shell-shock for people who saw a billion-dollar figure cross the wire," says Brent Thill, an analyst for

Credit Suisse First Boston

who rates Peregrine a buy. (His firm has advised Peregrine in the past on mergers and acquistions.)

Remedy shares rocketed on the news, trading up $12.18, or 66%, to finish at $30.52 in Monday trading. Peregrine shares fell $3.30, or 11.5%, to close at $25.51.

But Thill and other analysts say that considering the valuation the deal assigns Remedy -- basically three and a half times trailing 12-month revenues -- the price isn't that rich.

"That's not exorbitant for a software company expected to grow at 20% to 25% over the next year," says Pat Mason, an analyst with

Wit Soundview

who rates Peregrine a strong buy and Remedy a hold. "And they're not paying a premium on an earnings basis, either." At Monday's valuation, Peregrine is paying 26 times 2002 earnings.

Meanwhile, Peregrine essentially gets to take out a pesky competitor in the help-desk and services space for smaller businesses, while getting Remedy's customer relationship management software to boot. Peregrine's core business is selling software that helps larger corporations manage their assets -- stuff like property, buildings and computers -- in an efficient way.

As a part of that, it also offers help and service desk software, the stuff that the tech guy at your company uses to help you when you call because your network connection is on the fritz. While Peregrine's offering in that space typically goes for about $300,000, according to Thill, Remedy's sells for just a third of that, albeit to smaller businesses. Even though the two companies concentrate on slightly different markets, Remedy's presence was enough to put pressure on Peregrine's prices.

Now, for Peregrine, a company that has been aggressive with, and successfully implemented, acquisitions in the past, that pressure is gone.

"Strategically, it's the right thing for them to do," says Richard Parower, an analyst for the $4.1 billion

(SLMCX) - Get Report

Seligman Communications & Information fund, which holds shares in both companies. "It takes out their largest competitor, gives them access to a large customer base, and should take the pricing pressure off the market."

While Remedy did $288.5 million in revenue in 2000, the company has felt the pressure of a slowdown in technology spending, and has disappointed Wall Street over the past year. For the first three months of 2001, it badly missed its numbers, posting a loss of 6 cents per share, vs. analysts' expectations of a profit. At the same time, Remedy CEO Larry Garlick took a hard line about not wanting to sell the company, which could explain the premium Peregrine agreed to pay over Remedy's closing price from Friday.

"They still priced it so it would be accretive to earnings, and at a level that Remedy management would sell," said Parower. "

Remedy had been pretty adamant about not wanting to sell, but everyone has their price."

Peregrine says the acquisition will add to its earnings in its current fiscal year, which ends March 31, 2002. The company expects the deal to close in August or September.

Still, no one would blame investors for casting a skeptical eye toward the deal actually getting done. Not after Ariba had to scrap its proposed acquisition of

Agile

earlier this year, and

FreeMarkets

nixed its deal to buy

Adexa

last week.

Analysts, however, say this deal is different, largely because both Peregrine and Remedy are more established companies -- Peregrine is 20 years old, Remedy 11 -- and because each at least has a history of profitability. No one could say that with any certainty about the companies involved in the aforementioned, unconsummated deals.

" I don't think you can put this acquisition in that kind of camp," says Wit Soundview's Mason. "Adexa was a start-up, private company, and Ariba had its own problems in completely missing its quarter by a significant amount."

Also putting the odds in favor of this deal going through is Peregrine's history of successfully acquiring and integrating other companies into its business. In 2000, the company suffered investor backlash when it bought old-tech company

Harbinger

. Since then, it has

integrated that technology into its own, letting corporations update, instead of throw out, software they bought years ago.

And "Remedy is a lot simpler company than Harbinger was," says Seligman's Parower. "It does create more risk in the near term -- any acquisition or merger would. But long term, it's probably the right thing to do."

Of course, with other software deals falling through this year, investors won't know if that's the case until both companies sign on the dotted line.

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