Let's Get Pivotal

Even though the former Canadian highflier hasn't posted a profit since June 2000, three companies are falling all over themselves to buy Pivotal, a provider of customer-relationship-management, or CRM, software. Why? Because what the company lacks on its bottom line it makes up for in customers — 1,660 of them to be exact, including CIBC, Royal Bank of Canada (RY) and Palm (PLMO).

"The enterprise-software market is consolidating," says Erin Kinikin, an analyst at technology research firm Forrester Research, referring to the applications used by big businesses. "And during consolidations, companies get bought for their customers. Pivotal's customers are paying 18% a year [of the software license] to get updates from Pivotal, and that's a great cash-flow base for an acquirer to just milk."

For fiscal 2003, ended June 30, Pivotal lost $27.6 million, or $1.10 a share, on sales of $56.1 million.

"That's been a model for the recent M&A activity," says Jonathan Geurkink, an analyst at Ragen MacKenzie-Wells Fargo, a Seattle brokerage. "A lot of companies are looking for a service-maintenance stream from the customer base of an acquiree."

The latest to enter the bidding for Pivotal is Chinadotcom (CHINA). On Tuesday, through its CDC Software unit, Chinadotcom offered Pivotal shareholders either $2 in cash or $1 in cash plus $1.14 worth of Chinadotcom shares. The total value of the deal was between $52.5 million and $56.1 million. Chinadotcom, which distributes enterprise software, also offered to supply up to $20 million in bridge financing to keep Pivotal running smoothly until the merger was finalized. Pivotal's shares jumped 11% to $2.06, while Chinadotcom's rose 1% to $8.40.

It was a pivotal moment for Pivotal as the company's shareholders were preparing to vote Tuesday on another offer from Oak Investment Partners, a private equity firm based in Westport, Conn. Oak planned to combine Pivotal with a software company it controls called Talisma. Considering the Chinadotcom deal added up to a 20% premium over the Oak bid, Pivotal delayed the vote.

In April, Pivotal came to the conclusion that it couldn't flourish on its own. With its stock trading as low as 77 cents and other financing options unfavorable, the company effectively put itself up for sale. After contacting 47 parties, Oak offered to buy Pivotal for $1.78 a share cash — a deal that Pivotal accepted on Oct. 8.

Then last Wednesday Onyx Software (ONXS), one of Pivotal's chief rivals in the CRM arena, sought to derail that combination. The Bellevue, Wash.-based software maker offered 0.475 Onyx shares, at the Nov. 11 closing price of $4.73, which worked out to $2.25 for each Pivotal share, a 26% premium to the Oak deal. Pivotal rejected the Onyx overture on Friday, saying the deal was a bad fit for a number of reasons including the volatility of Onyx shares and the uncertainty created by lawsuits against the company.

"I'm not surprised to see others jump in," says Alan Davis, an analyst at McAdams Wright Ragen. "I think all of this is reflective of the price of the original deal. Oak came in with a lowball offer?. Pivotal is a decent company, and the valuation of the offer Oak was trying to run through was low. So the others said, 'Why not? Let's take a shot at it.'" (Davis doesn't own shares of any of these companies; McAdams Wright Ragen doesn't do investment banking with any of them.)

In its pitch to Pivotal, Onyx said the combination would've created the second-largest pure-play CRM vendor behind Siebel Systems (SEBL), with over 2,600 customers and an annual revenue run rate of more than $110 million. CRM software is used by sales and marketing departments to track and manage interactions with clients. Last year, Onyx posted a loss, including charges, of $13.7 million, or 28 cents a share, on revenue of $69.4 million.

"For Onyx it's a good fit," says Ragen MacKenzie's Geurkink. "They both target the middle-market. Onyx is middle-market and up, and Pivotal is middle-market and down. Overall, it would help the two of them get a little more healthy, and for Pivotal, the benefit is Onyx has been around a long time. It's one of the first in CRM, and Oak's Talisma is private. It hasn't been doing it as long, and there's more of a question there." (Geurkink owns shares of Onyx Software; Ragen MacKenzie-Wells Fargo has investment-banking relationship with Onyx Software.)

The market for midlevel CRM suppliers has suffered greatly since the technology bubble burst. Now customers want to hook up with well-established companies that will still be around in five to 10 years. So, instead of signing up with a pure-play CRM, customers want CRM software from bigger vendors that provide a full range of enterprise resource planning, or ERP, software, such as Chinadotcom. ERP software tracks financials, human resources and manufacturing activities.

"When the music stops, all the ERP vendors need to end up with CRM capabilities," says Forrester's Kinikin, "because companies want one software package to manage all their major processes, not a mish-mash. So companies that want one solution are looking at ERP vendors, and companies that want safety in longevity want Microsoft (MSFT)."

The way Kinikin sees it, Chinadotcom is the closest thing to a white knight. While Oak may be trying to salvage Talisma by combining it with Pivotal, and Onyx is after a rival's customers, Chinadotcom has the cash necessary to give Pivotal more punch than it has on its own. In addition, Chinadotcom likely wants Pivotal's software as well as its customers. And considering that a sizeable amount of Pivotal's development is in India, and Chinadotcom's customers are primarily in Asia, it could create the first Pacific powerhouse for enterprise applications. (Kinikin doesn't own shares of any of these companies.)

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"The Onyx proposal was rejected, so that won't go to vote for the shareholders," says Leslie Castellani, Pivotal's director of corporate communications. "We had previously scheduled a meeting for [Tuesday] for the Oak deal. We adjourned the meeting to Friday. The purpose of Friday's meeting is to vote on the Talisma/Oak deal. But, once the board has had the time to do the necessary review of the new proposal we will issue a response. After the board issues a response to the Chinadotcom offer, that will determine how Friday's meeting plays out."