John Appel

JDA's Retrade Is Justified

Supporter - I should have said, “I would not pay” instead of “no acquirer would pay.” I consider book/tax differences in the context of the transaction as a whole, and usually have found that favorable differences are offset by other, unfavorable, differences resulting from the acquisition. As for NOLs, since IRC sect. 382 limits annual use to the product of the company value and the long-term muni bond rate, the PV is very small. If the NOLs arose from previous acquisitions, they may already be subject to separate sect. 382 limits. It is worth noting that in its latest 10-Q, ITWO states, “We have open tax years for the U.S. federal return back to 1992 with respect to our net operating loss (“NOL”) carryforwards, where the IRS may not raise tax for these years, but can reduce NOLs.” One might also consider that ITWO’s Strategic Review Committee mentioned in its 5/7/08 call that, “Under most stand-alone scenarios, it is expected that the company would not begin to utilize the NOLs until at least 2012, though we must point out that this depends entirely on the company’s ability to generate additional U.S.-based taxable income. Under these scenarios, the net present value of the cash savings attributable to NOLs could be significantly less than the perceived nominal value. So while the SRC believes that the NOLs are important and have value going forward, the ultimate realizable value is most likely less than many people might believe.” After factoring in uncertainties re timing and likelihood of realization, I generally consider the probability-adjusted PV of NOL carryforwards to be negligible, and better viewed as a potential cushion to offset downside risks than as an asset worthy of additional cash consideration. I applied this logic to the JDAS-ITWO deal and stand by it.


On Nov 10 08:13 PM supporter wrote:

> The book/tax differences do have value to an acquiror because there
> are no limitations on those assets under a change in control. ITWO's
> strategic review committee called this fact out on their May 2008
> update call. The NOL usage has an annual limitation of the Treasury
> rate multiplied by the purchase price of the company. So in this
> case, if JDAS purchased ITWO for $345m and the treasury rate is 5%,
> then it could use $17m a year, which would save JDAS about $6m in
> cash taxes per year. The JDAS CFO even called the annual cash value
> of the NOL's on the acquistion cal. So if you are going to continue
> publishing valuation cases on the internet, please get your facts
> straight before doing so.

JDA's Retrade Is Justified

- No acquirer would pay for book/tax differences or NOLs because they can't use them post-acquisition in a stock purchase deal.
- The market values each of ITWO and JDAS at about 4x EBITDA. IF JDAS were willing to pay $11.50/shr for ITWO, it would be a significant premium to what ITWO is worth today. I have no idea if JDAS still wants to do the deal, or what price they would pay.
-The 4x EBITDA for ITWO is probably understated because it is based on results for the 12 mos ended 6/30. As of that time, sales and earnings were trending down, so it would not be surprising if Q3 is more of the same. Surely JDAS knows what ITWO's Q3 looks like. The recent downward revision of the minimum EBITDA covenant on the acquisition debt is probably a directional indication. Since JDAS had a great Q3 and also reaffirmed its guidance for the full year, it seems unlikely that it was the JDAS side of the pro forma EBITDA that triggered the need to revise the covenant....


On Nov 10 11:43 AM supporter wrote:

> I agree with contrahour. Pro forma for at least $15m in synergies
> that JDAS would achieve, ITWO's ebitda would have been $60m. Also,
> ITWO has a significant book/tax difference asset that amounts to
> approximately $170m and a $1.8B NOL. Together, these tax assets
> probably have a NPV of about $100m. So, adjusting ITWO's purchase
> price of $345m for the $100m of value in the tax assets and dividing
> the new number of $240m by $60m of PF EBITDA, then JDAS really only
> paid 4.0x for ITWO. If people think $11.50 is a reasonable price
> for ITWO, then that multiple works out to be 2.7x.... which is obviously
> ridiculous.

JDA's Retrade Is Justified

The SAP payment is included in the enterprise value calculation for ITWO as part of the $222 in cash. The article has a link to the calculations at johnappel.wordpress.co.../
ITWO has $143MM of unrestricted cash on its balance sheet as of 6/30. Add $79MM and you get $222. This is the same figure JDAS has used in its presentations.


On Nov 10 08:38 AM Contrahour wrote:

> Your analyis gives ITWO no credit for the $80 million payment ITWO
> will recieve from SAP in regards to its out of court settlement.
> ITWO should receive this payment in the current quarter.
>
> If you include this amount, it seems JDAS is clearly trying to steal
> ITWO. The original deal was already at the low end of the valuation
> range and to lower it any more would not be acceptable. If JDAS
> wants to lower the price, ITWO should take the $20 million and move
> on. It can survive just fine without JDAS.