Investors Cool Toward Whittman-Hart’s Plan to Acquire USWeb
High-tech consultant Whittman-Hart Inc. said Monday that it would buy Internet services firm USWeb/CKS Corp., but investors gave an immediate thumbs down to the deal, helping send its value down by more than $2 billion, to $5.7 billion.
The acquisition, which would form the largest Internet advice firm, was worth $8 billion based on Friday’s prices but dropped in value as Whittman-Hart’s stock plunged $24.75, or 31%, to close at $54.50 on Nasdaq. Shares in San Francisco-based USWeb fell $7.06, or 14%, to close at $43.81, also on Nasdaq.
The merger marks a further transformation of Whittman-Hart, a traditional information-technology company founded 15 years ago, into a leader in the booming Internet consulting field. The profitable Whittman is joining with the money-losing USWeb/CKS, a full-service Internet consultant built up through a series of previous mergers.
Under the deal, each share of USWeb/CKS stock would be exchanged for 0.865 share of Whittman-Hart, but USWeb stockholders will end up with 57% of the stock and Whittman stockholders with 43%.
The teaming up of the more traditional information-technology company and a relative Web start-up alarmed investors in both companies.
“If you had asked me to put two companies together and given me 10 chances, I wouldn’t have come up with this combination,” said Rich Leggett, an analyst at Friedman Billings Ramsey in Washington. “This deal just blindsided Wall Street. I’ve talked to a number of [Whittman-Hart] investors, and they’re scratching their heads.”
Whittman-Hart has grown into a successful consulting firm that targets medium-size companies or divisions of large companies, while USWeb/CKS provides consulting on Internet strategy to larger companies such as Harley-Davidson Inc. and Apple Computer Inc. and has grown mostly through acquisition.
Whittman-Hart “has always been viewed as a tremendous company with a very favorable growth outlook,” Leggett said. “USWeb, on the other hand, has had a volatile history as a public company.”
But the deal reflects the growing need of start-up Internet consulting firms to integrate with back-office operations, which is Whittman’s specialty. With e-commerce expected to surge to $1.5 trillion by 2003, according to market researcher Forrester Research, consulting and services companies are looking to provide companies large and small with consulting and services on Internet strategy, marketing and utilizing the global network to streamline customers’ businesses.
“We realize that executives today face new challenges as a result of the Internet’s deep impact on business. And their companies are likely to face a series of investments and divestments that will transform their business models,” said USWeb/CKS Chief Executive Robert Shaw, who will become chairman of the combined company, which has yet to be named.
In a conference call with analysts and reporters, executives of the companies said the deal, which is expected to close in April, should add slightly to earnings and would use the purchase accounting method.
Robert Bernard, chief executive of Whittman-Hart, will be chief executive and president of the new company.
Bernard said the merged company would bring a sense of urgency and commitment to any client needing to sharpen its Internet focus and the size of any company is not necessarily an indication of its commitment or need for Internet solutions.
“The little guy has an opportunity to compete with the big guy,” he said. Bernard said a massive need is emerging for a new breed of digital solutions, which includes providing Internet strategy, creative and marketing support and technology expertise. About Jan. 4 or 5, after the transition to 2000, Bernard foresees an explosion of spending and interest in the Internet.
Burt Young, who would be chief financial officer, called the financial position of the new company very strong, with more than $1 billion in annualized revenue, $300 million in cash and no debt on the books.
“This has got tremendous financial capabilities,” Young, currently chief financial officer at Whittman-Hart, said on the conference call.
The main headquarters of the merged company would be in Chicago, with executive offices also maintained in California near Silicon Valley, executives said. Total employees would be more than 8,000.
