To rescue a deal that was apparently going sour, Hogan Systems Inc., a bank software firm, has accepted a lower buyout bid from Continuum Co.
The change in their merger agreement followed Hogan's report last month of earnings in its latest quarter, which apparently disappointed Continuum executives. The deal was awaiting approval by the two companies' shareholders.
Officials at Dallas-based Hogan said the revised agreement calls for each share of Hogan common stock to be exchanged for 0.315 of a Continuum share. In the previous agreement, announced Dec. 11, the exchange ratio was 0.3556 of a Continuum common share for each Hogan share. The merger was valued then at $192 million; it was worth about $190 million at Friday's prices.
Continuum, based in Austin, Tex., develops application software and sells outsourcing services to the insurance industry.
In a press release, both companies said the revision resolves a disagreement that arose Jan. 26, when Hogan reported operating results for the third quarter of its fiscal 1996 that were "substantially less" than Continuum management had expected.
As part of the revised merger pact, the parties agreed that Hogan's operating performance would not form the basis for any further action that could "postpone, terminate, or amend" the deal.
Continuum chief executive W. Michael Long and Hogan chairman and CEO Michael H. Anderson said the new deal "is in the best interest of their respective shareholders and is in the long-term strategic interests of both companies."
But Wall Street sources said the merger almost fell apart when Continuum's management saw the results from Hogan's third fiscal quarter, which ended Dec. 31. Especially disturbing, these sources said, was software license revenue - only $900,000. Hogan reported $23 million of revenue overall and a net profit of $664,000 for the quarter.
Strengthening Continuum's negotiating position was the fact that Hogan had agreed to pay a $5 million breakup fee if the acquiring company could prove the bank software firm had misrepresented its financial condition, analysts said.
"There's no question that there were representations by Hogan that they would have closed more contracts" in the last quarter, said Donald H. Newman, an analyst at Ladenburg, Thalmann & Co. in New York. "They went to great pains in their (third-quarter) earnings release to say that they were going to close those contracts in this quarter."
Richard X. Bove, an analyst at Raymond James & Associates Inc. in Clearwater, Fla., said some Continuum stockholders - particularly DST Systems Inc., a leading technology outsourcing firm to the mutual fund industry that holds a 29% stake in Continuum - also expressed misgivings about the original deal.
"DST was fighting this behind the scenes," Mr. Bove said. "They never really supported the deal as it stood."
A DST spokesman disputed that assertion Friday, saying the company had publicly endorsed the merger when it was announced. "We have not made a public statement about this latest transaction," he added.
