CDC Tries to Justify Onyx Transaction Proposal (CHINA, ONXS, ORCL)


China enterprise software company CDC Corporation (ticker: CHINA) held a conference call this morning to discuss its proposed transaction with Onyx (ticker: ONXS). The call was an attempt to sway Onyx to open discussions with CDC after the former announced yesterday that its Board had unanimously rejected the latter's proposal. CDC Software President Rick Marquardt explained the reasoning for the deal:

We strongly believe that in today's enterprise application market that size does matter.

Oracle, through its acquisition of PeopleSoft and Siebel, is a joint competitor for both CDC Software's Pivotal CRM products and for Onyx. Organizations seeking world-class CRM offerings will want to look at more than just Oracle in evaluating solutions. The combination of Pivotal and Onyx offer the market a clear choice. Together we would have over 3,000 CRM customers around the world.

Each of us shares the need to focus on vertical industries to differentiate our solutions in the marketplace. CDC Software and Onyx complement vertical industry strengths. Pivotal has been strong in financial services, but mainly in asset management and banking. It's also strong in manufacturing and in homebuilding construction. Onyx is also strong in financial services, but in areas such as insurance; and also has great strength in government and in healthcare -- clearly different vertical industry strengths that complement each other.

Pivotal sales are mainly direct sales and very little license revenue through partners. In looking at Onyx…..two-thirds of their license revenue came through partners. CDC could certainly take advantage of the existing Onyx partners to sell additional products.

(Quotes are from the CCBN StreetEvents transcript.)

Comment: The following is a list of reasons why Onyx chose to reject the deal:

  • CDC Software division assets are performing poorly, as evidenced by lower reported 2005 license growth compared to Onyx;
  • CDC is proposing that Onyx pay a significant premium for the CDC Software division assets;
  • CDC lacks a sustained history of profitable operations and has a poor track record of delivering shareholder value, but would have a significant controlling interest in the combined entity;
  • CDC has so far been unable to achieve synergies among the CDC Software assets it has proposed to combine with Onyx, as demonstrated by the steadily decreasing valuation of CDC since the Ross and Pivotal acquisitions;
  • The expectation that there would be limited synergies between the Onyx and CDC product lines compared with significant and inevitable cash costs of combining and integrating the two entities, and the potential for customer attrition;
  • The proposal will be highly dilutive to current Onyx shareholders;
  • Current Onyx shareholders would receive no cash consideration and would face the prospect of limited liquidity; and
  • Input from major Onyx shareholders who expressed a strong negative reaction to the proposal.

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