Marketer CUC to Buy Davidson & Associates


Signaling both the rapid consolidation underway in the multimedia software business and the swift rise of electronic commerce, a major East Coast marketing company said Tuesday that it will acquire both Davidson & Associates, the Torrance-based educational software leader, and Sierra On-Line Inc., a Bellevue, Wash.-based interactive entertainment company, in a pair of stock swaps worth a combined $1.7 billion.

CUC International Inc., a Stamford, Conn., company that sells discounted products and services to tens of millions of people through its shopping clubs, said the talents of the two multimedia companies will help it move into the online world with a range of attractive services.

“We believe the online world will expand dramatically,” said Walter Forbes, chief executive of CUC. “And we are likely to be the premier content player.”

But the unusual dual acquisition quickly ran into trouble on Wall Street, where CUC shares plunged $6.25 to close at $31.25 on the New York Stock Exchange. Under terms of the merger, the deal is off if CUC shares fall below $29. Davidson’s stock, by contrast, jumped $6 to $24.50 and Sierra climbed $7.375 to $34.50 in Nasdaq trading.


It remained unclear Tuesday exactly how CUC intended to exploit the strengths of Davidson and Sierra On-Line. CUC would sell the two companies’ products through its clubs, but Forbes spoke only vaguely of new online shopping services that might employ some of the multimedia talents of the software companies.

“They are saying they are in the content business, but that doesn’t fly,” said Craig Bibb at PaineWebber, whose downgrade of CUC shares contributed to the sell-off. “They’ve become a conglomerate and invested in an unrelated business.”


The multimedia software business has been undergoing a wave of mergers over the last year as companies seek to gain the muscle they need to compete for limited space on store shelves. Learning Co., a major rival of Davidson, was swallowed up by SoftKey International last year after a bidding war with Broderbund Software Inc., another major multimedia company.


While share prices of many software firms--including Davidson and Sierra--have been dropping in recent months as earnings are hurt by price competition, they still trade at substantial premiums. Davidson, for example, will have only about $150 million in revenue for fiscal 1995, yet is commanding a whopping $956 million in CUC stock, based on Tuesday’s closing prices. Sierra On-Line shareholders would receive $765 million in stock.

If completed, the deal will cap a remarkable run for Jan and Bob Davidson, who founded the company that bears their name just over a decade ago and stand to receive about $700 million worth of CUC stock. That would give them about a 10% stake in CUC, as well as two seats on its board of directors.

“They want to be the most engaging online shopping place,” said Bob Davidson, who is chief executive of Davidson and would be appointed vice chairman of CUC. “There isn’t much more capability than Sierra On-Line and we have in making online experiences exciting.

“Jan and I will be the largest shareholders of CUC,” he added. “We’re not just dumping this business.”

Both Davidson and Sierra would continue to operate independently with current management after completion of the acquisitions.

“CUC could represent the ultimate home-shopping network on your PC,” said Keith Benjamin, analyst at Robertson Stephens. “When you think of shopping from your PC, software has to be at the top of the list.”

Jan Davidson, a former teacher, started developing educational software in 1984, focusing on sales to schools. As the market for multimedia computers exploded, Davidson quickly emerged as a leader with popular educational titles such as Math Blaster.

Bob Davidson expects the industry, now populated by more than 1,000 companies, to shrink to about half a dozen major companies--much like the record business--as the leading companies develop the strongest product lines and the best distribution systems.


“You’re just seeing the first wave of acquisitions,” said Ann Stephens, president of Reston, Va.-based market researcher PC Data. “When it comes to marketing, bigger is better.”

The Davidsons said the acquisition will be more likely to succeed than previous deals linking publishing houses and media companies because CUC has a more entrepreneurial culture. The couple were amazed to find just 20 people in the corporate offices at CUC, a company with sales last year of more than $1 billion.

The Davidsons said the merger would not affect the composition or orientation of their company. About 250 of the company’s 750 employees are based in Torrance and Gardena.


Although the benefits to Davidson and Sierra On-Line are clear, some analysts expressed doubts about whether CUC needed to spend nearly $2 billion to get access to the products and talents it needs to enter the online business. The company’s primary “content” today is its databases of member shoppers and ties to manufacturers that provide products directly to its customers at sharply discounted prices.

“It’s great that the company has aspirations for the electronic marketplace, but that’s not what pays the bills,” said Bibb of PaineWebber.

But CUC’s Forbes said there was no alternative. “We’re owners. We don’t like joint ventures,” he said. “Since [multimedia] is a fundamental part of our strategy, we don’t want to share any of this.”

CUC already has an online site called Shoppers Advantage and plans to expand it by enabling members of all its auto, travel and other shopping clubs to get their products online. Today, shoppers call an 800 number and an operator finds the “best,” or lowest, product price available.


Forbes said Davidson and Sierra On-Line will help develop a more attractive interface for the service but also will provide content in the rapidly growing fields of education and entertainment--where it will come up against such powerhouses as Walt Disney Co. and Microsoft Corp.

Sierra On-Line, which was also founded by a couple, Ken and Roberta Williams, already offers online games as well as CD-ROM titles. Analysts suggest Sierra’s entertainment software could be used to help draw consumers to CUC’s online site.

Forbes said a wide range of services will be available through the site, including apartment rental information. CUC announced Tuesday that it has purchased Rent Net, a company that has a database of 300,000 apartments for rent nationwide that it offers customers online.