Updated from 10:43 a.m. EST
For a change, many investors despised an Internet deal.
Shares of both
plunged on Monday after the companies announced an all-stock merger.
The selloff wiped out for now any premium that USWeb/CKS shareholders would have received for their stock.
The companies both provide professional services over the Internet, and the proposed merger would meld the business-to-business operations of Whittman-Hart with the business-to-consumer operations of USWeb/CKS.
Shares of Whittman-Hart closed down 24 3/4, or 31%, at 54 1/2. The plunge meant the deal valued USWeb/CKS' shares at $47.14 apiece, about $3.73 below their closing price on Friday.
Shares of USWeb/CKS settled down 7 1/16, or 14%, at 43 13/16.
Under the terms of the deal, each outstanding share of USWeb/CKS will be exchanged for 0.865 shares of Whittman-Hart stock. After the deal closes, which is expected to occur in the spring of next year, USWeb/CKS shareholders will own approximately 57% of the company, while Whittman-Hart shareholders will own approximately 43%.
The deal was valued at about $8 billion on a fully diluted basis, based on Whittman-Hart's closing price of 79 1/4 on Friday. At that price, USWeb/CKS' shareholders would have received a premium of $17.68 over the company's closing price of 50 7/8 on Friday. But Monday's selloff reduced the value of the deal to about $5.7 billion by the market close.
In merger situations, it is common for investors to sell off the shares of the acquirer but not to this extent. The deal is neutral to slightly accretive on a cash earnings-per-share basis. However, analysts estimate that Whittman-Hart could take a $1 billion to $1.5 billion charge for goodwill. "That would make the transaction dilutive," said analyst Eric Ross of
. He rates the company a strong buy and his firm has done no underwriting for Whittman-Hart.
Analysts noted that shares of Whittman-Hart, along with rivals
, have enjoyed precipitous gains over the past two and a half months, with Whittman-Hart shooting up 133% from its 33 9/16 close on Sept. 27 to 79 1/4 last Friday.
Drake Johnstone, an analyst at
Davenport & Co.
, theorized that investors may have decided to lock in some of their gains. Retail investors seem to be taking significant gains, while institutional investors are less concerned and continue to hold onto the stock.
Also, Whittman-Hart shareholders may be unhappy that USWeb/CKS shareholders will hold a majority of the new company and that they now have a stake in a very different stock and company. "The combination creates an 800-pound gorilla for the Internet services market," said Ross. "Before the merger, the company was easily defined as back-end and middle-market. Now it's front to back and is now the only company with scale in the sole source market."
In addition, analysts said, investors are concerned about how USWeb/CKS will integrate the various mergers that it has already engineered over the past 12 months. The tie-up between USWeb and CKS Group was approved only a year ago and, just three months ago, USWeb/CKS completed a major acquisition with
Mitchell Madison Group
, a strategy consulting firm focused on business-to-business commerce. "The market is concerned about all the different things happening, worrying about integrating the companies already bought and now integrating Whittman-Hart into one set of systems," Johnstone said. "This is a far more complex situation."
Johnstone downgraded USWeb/CKS from an accumulate to a hold on the merger news and his firm has done no underwriting for the company. He does not cover Whittman-Hart.
San Francisco-based USWeb/CKS is a leader in the business-to-consumer marketplace, focusing on strategic advisory, advertising and Web design services, as well as front- and back-office system integration services. Recently, the company's been hired to build an educational portal for
, develop Internet solutions for
and develop an e-commerce business for
Meanwhile, Chicago-based Whittman-Hart is a leader in the business-to-business marketplace, specializing in supply chain services as well as systems integration and software development.
Despite the dive in the stock prices, the merger actually makes sense to analysts. "It's a pretty good marriage," Johnstone said. "The combined company will have the range and capability to fully help corporations to be positioned on the Internet -- from supply chain to manufacturing to communication with the customer, be that a business or a consumer, in addition to developing a Web site and an advertising strategy and thinking strategically, the whole shooting match."
Added Ross, "If you subscribe to the view that following Y2K, the floodgates will open for IT spending and e-business, what better market is there to integrate in when demand is so strong?"
Target clients for the new company will be varied and include firms with no Internet presence, companies that are not taking full advantage of their presence on the Internet and Internet start-ups. "We are targeting companies that have similar business problems but more importantly a similar mindset," Robert Shaw, USWeb/CKS' chief executive and chairman of the board of the new company, said in a statement. "The delineators -- Fortune 500, middle market, B2B, bricks-and-mortar, dot-com -- have become irrelevant. The commonality among our client base is no longer size or market segment."
The combined company will be the largest of its kind. Scient, Viant,
have the same range of services but on a smaller scale. After all, the new combined company will have 8,000 employees, while Scient, for example, has but 450.
Robert Bernard, Whittman-Hart chairman and chief executive, will be chief executive and president of the new economy. Bert Young, Whittman-Hart chief financial officer, will retain that role for the new company, and Robert Clarkson, USWeb/CKS chief operating officer, will do the same.
The deal has a break-up fee of $150 million.
Morgan Stanley Dean Witter
advised USWeb/CKS while
Credit Suisse First Boston