I actually believe this is a fairly BIG part of price pressure on HRCT (and other otc-bb stocks) EZ
As Cash Disappears, Small Software Cos. Are Prey
This situation is far from unique to software. This is one reason down markets favor big companies with solid financial footing.
By Lisa Baertlein
PALO ALTO, Calif. (Reuters) - After defying the laws of business, gravity and nature during the technology market's go-go days, analysts say that small, unprofitable software companies are becoming prey to larger players as those laws again take hold.
``It's all one big Darwinian soup. Things form, operate, disintegrate, re-form,'' said Denis Pombriant, research director at the Aberdeen Group.
Among the companies already feeding from the trough are British accounting software maker Sage Group Plc (SGE.L), British electronic-business software vendor Merant Plc (MRN.L) and Minneapolis, Minn.-based e-commerce software provider Digital River Inc. (NasdaqNM:DRIV - news)
Activity is expected to become frenzied as little vendors, which once wielded market valuations rivaling those of well- established companies, fall victim to pessimistic investors and corporate America's diminished appetite for technology.
They are stuck in a vicious cycle. The flagging economy has stunted sales, which has contributed to plummeting stock prices. When shares are depressed, it is hard for unprofitable companies to go back to the market for money to fund operations as falling revenues fuel the burn of cash reserves.
``There were some companies that came out on the scene a year ago that you could tell were going to be R&D (research and development) acquisitions, they didn't have critical mass of their own to do battle in the world,'' Pombriant said.
Big Fish Eat Little Fish
``We have a lot of activity and a lot of deals in the process of being announced on the software side,'' said Robert Thornton, Deutsche Banc Alex. Brown's head of West Coast technology mergers and acquisitions.
``We have a different world. It doesn't really matter where the company got funded by the VCs, or what the last round of financing was. What matters is, 'Where do we go from here?''' Thornton said.
Industry giants like business-to-business (B2B) software maker i2 Technologies Inc. (NasdaqNM:ITWO - news) and SAP AG (SAPG.DE), Europe's biggest software maker, are already gobbling up private players such as RightWorks Corp. and TopTier Software Inc.
Analysts say cash-rich companies like No. 2 software maker Oracle Corp. (NasdaqNM:ORCL - news), e-business vendor PeopleSoft Inc. (NasdaqNM:PSFT - news) and others will soon be queuing up.
Timing Is Key
At the close last year, time and money appeared to be running short for Interact Commerce Corp. (NasdaqNM:IACT - news)
The Scottsdale, Ariz.-based company, which makes popular SalesLogix and ACT! selling software, started 2001 with net debt of $19 million.
In March, Sage Group Plc struck a deal to buy Interact in a cash transaction valued at $263 million.
E-business software vendor NetObjects Inc. (NasdaqNM:NETO - news) in February sold its enterprise division to Merant Plc for $18 million in cash. At the end of 2000, the company had $2.8 million in cash left, according to company filings with the U.S. Securities and Exchange Commission (news - web sites) (SEC).
While the cash-burn scenario that laid waste to the dot-com sector applies to struggling software makers, analysts say they will not be decimated the way the dot-coms were.
``Software companies, for the most part, have some kind of outright technology that will be valuable to someone -- as long as the price is right,'' said Mark Verbeck, senior analyst at Epoch Partners in San Francisco.
Cash Poor
If you can count the number of months a company can run on its remaining cash on the fingers of your two hands, it needs to be looking for survival alternatives, analysts said.
Kana Communications Inc. (NasdaqNM:KANA - news) is among the companies seeing its cash reserves dwindle.
The e-business software maker said Tuesday it has $20 million in cash remaining. It has cut staff to 870 from 1,200 and plans to outsource the hosting of its e-mail service in an effort to trim operational cash-burn, which was $30 million in the recent first quarter.
Calico Commerce Inc. (NasdaqNM:CLIC - news) -- which said in March it was selling its B2B exchange software division to Digital River in a stock deal valued at $7.8 million -- had $5.2 million in cash and $37.1 million in short-term investments on Dec. 31, according to SEC filings.
While selling all or part of a company can be a godsend, there are risks.
When acquiring companies make stock purchases, their targets can be taken on a bumpy ride that may leave them more battered than before the deal was struck.
That became clear earlier this week when former B2B darling Ariba Inc. (NasdaqNM:ARBA - news) walked away from its much-hyped merger deal with Agile Software Inc. (NasdaqNM:AGIL - news) after the Mountain View, Calif.-based software maker said the economic downturn would cause it to post a surprise loss and necessitate the elimination of one-third of its work force.
The value of the stock deal fell to about $400 million from $2.55 billion as Ariba's stock price dropped amid a multi-month rout of technology stocks.
Agile, which makes software that lets businesses share product designs and plans with their suppliers over the Web, said it would take a $5 million charge related to the unconsummated deal and the expense would cause it to post a fiscal fourth-quarter loss instead of the small profit the Street expected.
