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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
SCHEDULE 14D-9
(RULE 14d-101)
SOLICITATION/RECOMMENDATION STATEMENT UNDER
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
MERCATOR SOFTWARE, INC.
(NAME OF SUBJECT COMPANY)
MERCATOR SOFTWARE, INC.
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS)
(TITLE OF CLASS OF SECURITIES)
587587106
(CUSIP NUMBER OF CLASS OF SECURITIES)
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ROY C. KING
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
MERCATOR SOFTWARE, INC.
45 DANBURY ROAD
WILTON, CT 06897
TELEPHONE: (203) 761-8600
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE
NOTICE AND COMMUNICATION ON BEHALF OF THE PERSON(S) FILING STATEMENT)
COPY TO:
MICHAEL WEINSIER, ESQ.
CHARLES A. SAMUELSON, ESQ.
JENKENS & GILCHRIST PARKER CHAPIN LLP
405 LEXINGTON AVENUE
NEW YORK, NY 10174
TELEPHONE: (212) 704-6000
[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
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On August 8, 2003, Mercator Software, Inc., a Delaware corporation
("Mercator"), filed with the Securities and Exchange Commission a
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Initial Filing")
relating to a tender offer commenced by Greek Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of Ascential Software
Corporation, a Delaware corporation, on August 8, 2003 to purchase all of the
outstanding shares of Mercator's common stock, par value $0.01 per share,
together with the associated preferred stock purchase rights. Mercator filed
Amendment No. 1 to the Initial Filing on August 19, 2003 (the Initial Filing, as
amended by such Amendment No. 1, the "Schedule 14D-9"). Capitalized terms used
but not defined herein have the meanings assigned to them in the Schedule 14D-9.
This Amendment No. 2 to Schedule 14D-9 amends and supplements the Schedule
14D-9.
The information in the Schedule 14D-9 is hereby expressly incorporated
herein by reference, except as otherwise set forth below.
On August 19, 2003, a stockholder of Mercator filed a purported class
action lawsuit, captioned Kolton v. Mercator Software, Inc., et al., against
Mercator, its directors, Ascential and Purchaser that, among other things,
challenged the adequacy of the disclosure in the Initial Filing. On August 22,
2003, the parties to the lawsuit entered into a memorandum of understanding for
a settlement, which will be subject to court approval, pursuant to which the
lawsuit will be resolved. As part of that resolution, Mercactor agreed to
deliver this Amendment No. 2.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
Item 4(b)(i) of the Schedule 14D-9 is hereby amended and restated to read
in its entirety as follows:
(b)(i) BACKGROUND
The following information was prepared by Mercator and Ascential.
Information about Ascential was provided by Ascential and Mercator does not take
any responsibility for the accuracy or completeness of any information regarding
meetings or discussions in which Mercator did not participate.
From time to time, Mercator's management and Board have reviewed with their
legal and financial advisors various strategic alternatives, including remaining
an independent public company, the possibility of acquisitions or mergers with
other companies and other transactions. In connection with the Board's review of
such alternatives, J.P. Morgan Securities Inc. ("JPMorgan") provided the Board
with information about industry dynamics and Mercator's competitive landscape
during 2001 and 2002.
Additionally, Ascential approached Mercator regarding a possible business
partnership at the end of 2001. Preliminary discussions between representatives
of Mercator and Ascential were held in January and February of 2002 regarding
their respective product suites, capabilities and technologies. At that time,
the parties mutually determined not to proceed with any further discussions.
During December 2002, representatives of Strategic Software Holdings, LLC
("SSH"), a company that had acquired 2,000,000 shares of Mercator Common Stock
during the prior month, had several conversations with management and verbally
indicated that SSH was interested in acquiring 51% of the Shares. In light of
this verbal expression of interest, Mercator tentatively agreed to further
discussions with these representatives to be held on January 10, 2003.
The Board met on January 6, 2003 to discuss the nature and terms of the
verbal expression of interest, consider Mercator's own strategic plan and
progress in achieving that plan and other prospects for achieving value for
stockholders and the relative valuation of Mercator and its peers. Based on
these discussions, the Board determined not to engage in further discussions
with SSH, except in so far as Mercator communicates with and informs
stockholders in the ordinary course. On January 9, 2003, Mercator notified SSH
that Mercator was canceling the proposed meeting.
On March 14, 2003, SSH nominated a slate of seven directors to replace the
seven members of the Board. During the ensuing proxy contest, several members of
the Board discussed the possibility of more
1
aggressively exploring Mercator's strategic alternatives in order to improve the
return for Mercator's stockholders. The Board determined to engage an investment
bank in order to assist Mercator in the review of these alternatives and that
two of its members, Dennis Sisco and Mark Stevens, would work closely with
management in connection with the ongoing proxy contest, as well as a more
in-depth review of such alternatives. Thereafter, Messrs. Sisco and Stevens
regularly participated in meetings with Mercator's management and legal and
financial advisors relating to the proxy contest and the review of strategic
alternatives. Messrs. Sisco and Stevens also regularly updated the members of
the Board on the progress of this review and, until the end of the proxy
contest, met regularly with management and provided updates to the Board on its
status and progress.
On March 31, 2003, SSH submitted a proposal directly to the Board
purporting to contain an offer, subject to, among other things, receipt of
financing, pursuant to which SSH would acquire all of the outstanding Shares not
already owned by SSH for $2.17 per share in cash.
On April 1, 2003, Mr. Bienvenu, two of his lawyers and a representative
from his financial advisor met with Messrs. Stevens, Sisco and Kenneth J. Hall,
Mercator's Executive Vice President, Chief Financial Officer and Treasurer, as
well as two representatives from Mercator's outside counsel, Jenkens & Gilchrist
Parker Chapin LLP ("Jenkens & Gilchrist"). At the meeting, Mr. Bienvenu told
Mercator, among other things, that he had not yet received any financing for his
offer to buy Mercator and the strategy he proposed for Mercator was "extremely
risky."
Also on April 1, 2003, Mercator formally engaged JPMorgan to provide advice
in the proxy contest with SSH and in connection with a possible strategic
transaction involving Mercator.
At a meeting on April 3, 2003, the Board considered Mr. Bienvenu's
proposal. After discussion and presentations from Jenkens & Gilchrist and
JPMorgan, the Board unanimously determined that the proposal by SSH was not in
the best interests of its stockholders.
On April 7, 2003, Mr. Roy C. King, Mercator's Chairman of the Board, Chief
Executive Officer and President, and Messrs. Sisco, Stevens and Hall, as well as
David L. Goret, Mercator's General Counsel, met at the offices of JPMorgan with
representatives of JPMorgan and Jenkens & Gilchrist. The participants in the
meeting discussed a process in which JPMorgan would solicit indications of
interest from third parties who might be interested in acquiring Mercator,
discussed a preliminary list of third parties to be contacted and reviewed
strategic issues involved in managing the process.
During the week of April 7, 2003, JPMorgan initiated a program to contact
third parties that could be interested in acquiring Mercator. On that date,
JPMorgan contacted Robert McBride regarding a possible transaction between
Ascential and Mercator. JPMorgan eventually contacted 17 third parties, nine of
whom executed non-disclosure agreements.
At a meeting on April 8, 2003, the Board considered the process reviewed by
Messrs. Sisco, Stevens, Hall and Goret during the previous day.
On April 11, 2003, Peter Gyenes, Ascential's Chairman of the Board and
Chief Executive Officer, spoke with Mr. King, Mercator's Chairman of the Board,
Chief Executive Officer and President, regarding the possibility of Ascential
purchasing Mercator.
On April 17, 2003, Mercator and SSH entered into a settlement agreement
pursuant to which, among other things, SSH agreed to support (and the members of
the SSH group agreed to vote all of their shares of Mercator Common Stock in
favor of) Mercator's slate of seven nominees standing for election as directors
at its 2003 annual meeting. Under the settlement agreement, SSH also agreed to
certain "standstill" restrictions until January 15, 2004. These restrictions
prevent the members of the SSH group from, among other things: (i) attempting to
gain control of the Board; (ii) making any "hostile" proposals to acquire the
Company; and (iii) subject to certain agreed-upon exceptions, selling any
Shares. The settlement agreement permitted SSH to make a "qualified proposal"
(as defined in the settlement agreement).
2
During the period from April 25, 2003 through June 17, 2003, seven third
parties received management presentations and had question and answer sessions
with Mercator's management, including Ascential (whose management presentation
was on May 16, 2003).
On April 28, 2003, Mercator and Ascential agreed upon and Bear, Stearns &
Co. Inc. ("Bear Stearns"), Ascential's financial advisor, on behalf of
Ascential, and JPMorgan and Mercator executed a non-disclosure agreement, a copy
of which has been filed as Exhibit (e)(3) hereto. Ascential and Bear Stearns
received information to help Ascential evaluate the Mercator opportunity on the
following day.
During the period from April 30, 2003 to June 23, 2003, JPMorgan received
preliminary expressions of interest from Ascential and four of the other third
parties who had received management presentations. During this period, each of
these five parties began conducting due diligence to varying degrees based on
the level of interest expressed by each party, and Mercator's management and
JPMorgan pursued preliminary discussions with each of them about the terms of a
potential transaction. During this period, JPMorgan also reviewed the
expressions of interest submitted by each of these five parties periodically
with Mercator's management and the Board. As discussed below, two of these
parties (Ascential and the "Third Party" referred to below) ultimately submitted
formal proposals on June 30, 2003. The other three parties never submitted
formal proposals. The Board did review with JPMorgan the identity of these other
three parties and, among other factors, their creditworthiness, their sources of
financing, their transactional sophistication, the level of interest expressed
by the party, and the amount of due diligence they had conducted. Based on
advice from JPMorgan and the foregoing information about these other third
parties, the Board ultimately concluded that Ascential's proposal was superior
to any proposal likely to be made by these other third parties.
At a regularly scheduled meeting of the Board on May 14, 2003,
representatives of JPMorgan provided Mercator's directors with an update of the
work that had been completed to date in connection with the solicitation of
third parties who might be interested in acquiring Mercator.
During the period from May 16, 2003 through June 9, 2003, members of senior
management of Mercator and Ascential continued their discussions regarding the
possibility of a transaction.
At the annual meeting of the Board on May 30, 2003, representatives of
JPMorgan provided Mercator's directors with an update of the work that had been
completed to date in connection with the solicitation of third parties who might
be interested in acquiring Mercator.
On June 2, 2003, Mr. King spoke with Peter Gyenes, Ascential's Chairman and
Chief Executive Officer, regarding Ascential's interest in pursuing a
transaction with Mercator.
On June 9, 2003, Ascential presented Mercator with a non-binding
preliminary indication of interest to acquire Mercator at a price per share of
between $2.30 and $3.00. Additionally, Ascential highlighted the fact that
additional due diligence would be required in order to develop a more definitive
proposal.
On June 12 and 13, 2003, members of Mercator's senior management provided
Ascential's senior management with an overview of Mercator and discussed ways
the two companies could be combined.
On June 18, 2003, JPMorgan received a due diligence request list from
Ascential.
During the period from June 18, 2003 through June 30, 2003, several
conference calls took place between Ascential and Mercator to discuss the
potential for a transaction.
On June 20, 2003, Mr. Gyenes spoke with Mr. Hall regarding Ascential's
continued interest in a transaction with Mercator. Mr. Gyenes said that
Ascential would need to conduct additional due diligence in order to determine
whether to proceed.
On June 30, 2003, Mercator received proposals from Ascential and one other
third party (the "Third Party") seeking to enter into an exclusivity agreement
and work toward completing due diligence and signing a definitive agreement. The
Third Party proposed acquiring Mercator by exchanging all of the outstanding
Shares for the Third Party's stock based on a fixed exchange ratio without any
"price protection" for Mercator's stockholders (such "price protection" would
have provided that, in the event that the market price of the Third Party's
stock declined, the number of shares paid to Mercator's stockholders would
increase).
3
However, based on financial and other information from the Third Party and on
advice from JPMorgan, the Board concluded that the Third Party's stock was
highly volatile and was likely to provide Mercator's stockholders with less
value in a transaction than the price offered by Ascential. As a result of its
analysis, the Board instructed JPMorgan to attempt to negotiate price protection
as a component to the Third Party's offer. Despite repeated requests from
Mercator, the Third Party refused to offer Mercator's stockholders any price
protection. The price proposed by the Third Party on June 30, 2003 would have
provided Mercator's stockholders with stock of the Third Party with a value, as
of such date, less than 10% more than the price offered by Ascential. Since June
30, 2003, however, the market price of the Third Party's stock has fluctuated
considerably and, at times after the date the Merger Agreement was announced,
would have provided Mercator's stockholders with less value than the price
offered by Ascential.
On July 1, 2003, following discussion between JPMorgan and Bear Stearns,
Ascential sent Mercator a non-binding letter of intent and attached a
preliminary term sheet outlining the structure of the transaction as a cash
tender offer, as well as the proposed offer price of $3.00 per share, assuming
no additional share issuances, and a 30-day exclusivity period beginning on
Mercator's acceptance of the letter, subject to due diligence and other
customary conditions.
On July 2, 2003, the Board met telephonically to consider Ascential's
proposal to acquire Mercator. At the meeting, representatives of JPMorgan
reviewed with the Board the financial terms and relative merits of the proposal,
as well as the proposal from the Third Party, and representatives of Jenkens &
Gilchrist spoke about legal aspects of the proposals, as well as the fiduciary
duties of the Board under the circumstances. The primary factors the Board
considered were the absence of price protection offered by the Third Party and
the certainty of value provided by Ascential's all-cash proposal. After
discussion of the two proposals, the meeting adjourned to provide the directors
with an opportunity to review them. Later in the day, the meeting re-convened,
and the Board determined that Ascential's proposal was superior and approved the
letter of intent from Ascential.
On July 4 and 5, 2003, the parties exchanged information on the data needed
for Ascential to conduct its review of Mercator.
During the week of July 7, 2003, Ascential began conducting its due
diligence review of Mercator. Members of senior management of both companies had
numerous conversations and meetings in Norwalk, Connecticut and Westborough,
Massachusetts. Ascential's due diligence continued during the week of July 14,
2003.
On July 18, 2003, Ascential sent Mercator a draft Merger Agreement
containing all of the proposed terms and conditions of the proposed transaction.
During the period from July 18, 2003 through July 30, 2003, representatives
of Mercator (including Messrs. Sisco and Stevens) and Ascential and their
respective counsels and financial advisors negotiated specific terms and
provisions of the Merger Agreement, including the conditions to closing of the
Offer, the interim covenants, the circumstances under which a break-up fee would
be payable, the non-solicitation provisions, the efforts required to seek
regulatory approvals, the circumstances in which the parties could terminate the
Merger Agreement and the circumstances in which Ascential could amend or extend
the Offer. During this time, Ascential management and senior members of
Mercator's management met to discuss future synergies and implementation plans
for the combined company. Mr. Gyenes also met with certain members of the Board
of Directors to explain Ascential's plans for the combined company.
On July 23, 2003, Ascential's senior management made a presentation to
Ascential's board of directors regarding the transaction. Representatives of
Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden Arps"), Ascential's legal
counsel, and of Bear Stearns were present at the meeting.
On July 25, 2003, Ascential presented Mercator and certain key members of
its executive team with draft agreements and other arrangements for the
continued employment of such individuals by Ascential following the transaction
as well as non-competition and non-solicitation agreements to be executed by
each of the executive officers and certain other employees.
4
During the week of July 28, 2003, Ascential sent Mercator drafts of the
Stock Tender Agreement and Option Agreement. Purchaser was incorporated in the
State of Delaware during the same week.
On July 30, 2003, the Board met to consider Ascential's proposal and the
latest draft of the Merger Agreement. The Board received a detailed presentation
of the financial and legal aspects of the proposed transaction from members of
management, Jenkens & Gilchrist and JPMorgan. Messrs. Sisco and Stevens also
updated the Board. After discussion, the Board agreed that they would re-convene
on August 1, 2003 in order to formally consider the Merger Agreement and receive
a fairness presentation from JPMorgan.
From July 30, 2003 to August 1, 2003, representatives of Mercator and
Ascential and their respective counsels and financial advisors continued to
negotiate specific terms and provisions of the Merger Agreement.
Also on August 1, 2003, Mercator held a special meeting of the Board. After
discussion, which included review of all contacts between JPMorgan and
prospective bidders since April, updates regarding the financial and legal
aspects of the proposed transaction from members of Mercator's management and
from Jenkens & Gilchrist, JPMorgan delivered its oral opinion to the effect
that, as of that date, the consideration to be received by holders of Shares
pursuant to the Merger Agreement was fair, from a financial point of view, to
those holders, and the Board of Directors unanimously approved the Merger
Agreement and the transactions contemplated thereby (including the Offer and the
Merger) in all respects and recommended that Mercator's stockholders accept the
Offer and approve and adopt the Merger Agreement and the Merger.
On August 1, 2003, Ascential's senior management presented the transaction
to Ascential's board of directors, including a summary of the terms of the
transaction. Representatives of Skadden Arps and Bear Stearns were present at
the meeting. Ascential's board unanimously approved the Merger Agreement and the
transactions contemplated thereby, subject to management's approval of the final
drafts of the agreements. Purchaser's board also approved the Merger Agreement
and the transactions contemplated thereby.
Following the meeting, representatives of Mercator and Ascential and their
respective counsels negotiated specific terms and provisions of the Merger
Agreement and had several conversations to finalize the terms of the Merger
Agreement, the Option Agreement and the Stock Tender Agreement. Thereafter,
management met telephonically with Messrs. Sisco and Stevens, as well as
representatives of Jenkens & Gilchrist, to review the final documents and
confirm their final terms. JPMorgan then delivered its written opinion to the
effect that, as of August 2, 2003, the consideration to be received by holders
of Shares was fair, from a financial point of view, to those holders and
Mercator and Ascential executed the Merger Agreement.
On August 4, 2003, the parties publicly announced the transaction.
Item 4(b)(iii) of the Schedule 14D-9 is hereby amended and restated to read
in its entirety as follows:
(iii) OPINION OF J.P. MORGAN SECURITIES INC.
In an engagement letter dated April 1, 2003, Mercator engaged JPMorgan to
act as its exclusive financial advisor. JPMorgan is an internationally
recognized investment banking firm that has substantial experience with business
combinations similar to this transaction. As part of its investment banking
business, JPMorgan is engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, divestitures, negotiated
underwritings, primary and secondary distributions of listed and unlisted
securities and private placements.
At the August 1, 2003 meeting of the Board, JPMorgan delivered its oral
opinion, which was subsequently confirmed in a written opinion dated as of
August 2, 2003, to the effect that the consideration to be received in the Offer
and the Merger was fair, from a financial point of view, to the stockholders of
Mercator, as of that date, and subject to the assumptions, qualifications and
limitations set forth in the opinion.
THE FULL TEXT OF JPMORGAN'S OPINION DATED AUGUST 2, 2003, WHICH SETS FORTH,
AMONG OTHER THINGS, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY JPMORGAN IN RENDERING ITS
OPINION, IS ATTACHED AS ANNEX A TO THIS STATEMENT AND INCORPORATED IN THIS
STATEMENT BY REFERENCE. WE URGE YOU TO READ THIS OPINION CAREFULLY AND IN ITS
ENTIRETY. JPMORGAN'S OPINION IS
5
DIRECTED TO THE BOARD, ADDRESSES ONLY THE FAIRNESS OF THE CONSIDERATION TO BE
RECEIVED BY THE HOLDERS OF THE SHARES IN THE OFFER AND THE MERGER PURSUANT TO
THE MERGER AGREEMENT FROM A FINANCIAL POINT OF VIEW TO THOSE HOLDERS AND IT DOES
NOT ADDRESS ANY OTHER ASPECT OF THE OFFER OR THE MERGER OR CONSTITUTE A
RECOMMENDATION AS TO WHETHER HOLDERS OF THE SHARES SHOULD TENDER THEIR SHARES IN
THE OFFER OR AS TO HOW HOLDERS OF THE SHARES SHOULD VOTE AT ANY STOCKHOLDERS'
MEETING HELD IN CONNECTION WITH THE MERGER. THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In reading the discussion of the JPMorgan fairness opinion set forth below,
the holders of Mercator common stock should be aware that JPMorgan's opinion:
- did not address Mercator's underlying business decision to pursue this
transaction, the relative merits of this transaction as compared to any
alternative business strategies that might exist for Mercator or the
effects of any other transaction in which Mercator might engage; and
- did not constitute a recommendation to the Board of Directors or any of
our stockholders as to how to vote in connection with the transaction or
whether to tender their shares in the offer.
Although JPMorgan evaluated the fairness of the consideration from a
financial point of view to the stockholders of Mercator, excluding Ascential,
the consideration itself was determined through negotiations between Mercator
and Ascential and was approved by the Board of Directors. While JPMorgan did
provide financial advice to Mercator and the Board of Directors during the
course of these negotiations, the decision to approve and recommend this
transaction was solely that of the Board of Directors. JPMorgan's opinion was
one among numerous factors that Mercator and the Board of Directors took into
consideration in making its determination to approve and recommend this
transaction and the Merger Agreement.
In the course of performing its review and analyses for rendering this
opinion, JPMorgan has:
- reviewed a draft dated August 2, 2003 of the Merger Agreement;
- reviewed Mercator's Annual Reports to Stockholders and Annual Reports on
Form 10-K for the three years ended December 31, 2000 through 2002, its
Quarterly Reports on Form 10-Q for the periods ended March 31, 2002, June
30, 2002, September 30, 2002 and March 31, 2003, and its draft press
release to be dated August 4, 2003 setting forth the preliminary results
of operations for the quarter ended June 30, 2003;
- met with certain members of Mercator's senior management to discuss
Mercator's business, operations, historical financial results, management
base case projections, the risks to the management base case and future
prospects;
- reviewed certain internal financial analyses and forecasts prepared by
the management of the Company relating to its business;
- reviewed certain operating and financial information relating to
Mercator's business and prospects, including projections for the five
years ended December 31, 2007, provided to JPMorgan by management of
Mercator;
- performed discounted cash flow analyses on the management base case
projections;
- reviewed certain publicly available business and financial information
concerning the Company and the industries in which it operates;
- reviewed publicly available financial data, stock market performance data
and trading multiples of Mercator;
- reviewed publicly available financial data, stock market performance data
and trading multiples of companies in the business integration software
sector that JPMorgan believed to be relevant;
- reviewed the terms of (i) recent mergers and acquisitions of companies in
the software sector that JPMorgan believed to be relevant and (ii) premia
paid in the last twelve months in acquisitions of software companies which
JPMorgan believed relevant to its analysis of the transaction; and
6
- conducted such other studies, analyses, inquiries and investigations and
considered such other information as JPMorgan deemed appropriate.
In preparing its opinion, JPMorgan relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to JPMorgan by Mercator. JPMorgan also relied on
representations from Mercator's management that information regarding Mercator's
expected future performance was reasonably prepared on bases reflecting the best
currently available estimates and judgments of the senior management of
Mercator. JPMorgan did not assume any responsibility for the independent
verification of any such information, and relied upon the assurances of
Mercator's senior management that they were unaware of any facts that would make
the information regarding Mercator's expected future performance incomplete or
misleading.
In arriving at its opinion, JPMorgan did not perform or obtain any
independent appraisal of the assets or liabilities (contingent or otherwise) of
Mercator, nor was it furnished with any such appraisals. During the course of
its engagement, JPMorgan was authorized to seek offers for Mercator and JPMorgan
and Mercator's management held preliminary, informal discussions with other
companies with respect to a possible acquisition of Mercator, and JPMorgan
considered the results of those discussions in rendering its opinion. JPMorgan
has assumed that the transaction will be consummated in a timely manner and in
accordance with the terms of the Merger Agreement without any amendments or
modifications that collectively would have a material effect on Mercator.
JPMorgan's opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to JPMorgan as
of, the date of the opinion. It should be understood that subsequent
developments may affect this opinion and that JPMorgan does not have any
obligation to update, revise, or reaffirm this opinion. JPMorgan's opinion is
limited to the fairness, from a financial point of view, of the consideration to
be received by the holders of Shares in the proposed transaction with Ascential
and JPMorgan expresses no opinion as to the relative merits of the transaction
with Ascential as compared to other business strategies that might be available
to Mercator or the underlying decision by Mercator to engage in the transaction
with Ascential.
Set forth below is a brief summary of the transaction process evolution,
material valuation, financial and comparative analyses considered by JPMorgan in
connection with the rendering of the JPMorgan opinion. This summary does not
purport to be a complete description of the analyses underlying the JPMorgan
opinion.
In performing its analyses, JPMorgan made numerous assumptions with respect
to industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of JPMorgan,
Mercator and Ascential. Any estimates contained in the analyses performed by
JPMorgan are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by these
analyses. Additionally, estimates of the value of business or securities do not
purport to be appraisals or to reflect the prices at which such businesses or
securities may actually be sold. Accordingly, these analyses and estimates are
inherently subject to substantial uncertainty.
SUMMARY OF PROCESS
JPMorgan reviewed the process by which it solicited potential third party
interest in Mercator and observed the robust nature of the "market check." The
following paragraph summarizes the process.
Upon being retained by Mercator, JPMorgan launched and subsequently ran an
extensive "market check." Seventeen third parties were initially contacted by
JPMorgan to assess their interest in a possible transaction with Mercator; of
the seventeen parties, nine executed non-disclosure agreements; eight of these
nine parties received informational data packages; seven parties attended
management presentations with Mercator's senior management; five parties
submitted bids subsequent to management presentations; Mercator negotiated with
two possible suitors, which culminated in Ascential signing a letter of intent
that included a 30-day exclusivity agreement.
7
HISTORICAL STOCK TRADING ANALYSIS
JPMorgan reviewed the recent stock trading performance of Mercator common
stock and observed that Mercator common stock traded recently as a "deal stock",
which already included a control premium, in light of rumors and speculation of
a possible acquisition of Mercator. The following summary trading data is as of
July 31, 2003:
% PREMIUM TO: PRICE VOLUME
------------- ----- ---------
July 31, 2003............................................... $2.46 442,900
30-day "normalized average"(1).............................. 1.56 159,831
1-week average.............................................. 2.42 651,160
1-month average............................................. 1.96 580,877
3-month average............................................. 1.68 274,033
6-month average............................................. 1.57 212,259
12-month average............................................ 1.37 231,681
52 week high................................................ 2.66 2,462,000
52 week low................................................. 0.59 5,300
---------------
(1) Average price/volume for 30 trading days prior to price run-up on July 15,
2003
JPMorgan analyzed the trading volume within certain price ranges of
Mercator common stock during the last one month, three months, six months, and
twelve months ended July 31, 2003 as illustrated by the table below:
One month.................... $1.30-$1.60 $1.60-$1.90 $1.90-$2.20 $2.20-$2.50 $2.50-$2.80
% shares traded............ 4.3% 17.9% 41.7% 18.5% 17.7%
----------- ----------- ----------- ----------- -----------
Three months................. $1.00-$1.40 $1.40-$1.80 $1.80-$2.20 $2.20-$2.60 $2.60-$3.00
% shares traded............ 0.5% 39.3% 37.0% 11.8% 11.3%
----------- ----------- ----------- ----------- -----------
Six months................... $1.00-$1.40 $1.40-$1.80 $1.80-$2.20 $2.20-$2.60 $2.60-$3.00
% shares traded............ 5.4% 53.0% 25.6% 8.2% 7.8%
----------- ----------- ----------- ----------- -----------
One year..................... $0.59-$1.09 $1.09-$1.59 $1.59-$2.09 $2.09-$2.59 $2.59-$3.09
% shares traded............ 27.5% 37.7% 24.7% 6.5% 3.5%
----------- ----------- ----------- ----------- -----------
JPMorgan noted that over the last year, Mercator common stock predominantly
traded at less than $3.00 per share.
DISCOUNTED CASH FLOW ANALYSIS
JPMorgan performed a discounted cash flow analysis of Mercator to estimate
the present value of the unlevered after-tax free cash flows that Mercator could
generate. The analyses were based on management base case financial projections
for the five years ending December 31, 2007. Ranges of terminal values for the
discounted cash flows were estimated using perpetuity growth rates of 3.5% to
5.5% for the management base case. These growth rates were based on Mercator's
growth indicated by the management base case projections as well as growth rates
of publicly-traded technology companies that JPMorgan believed to be relevant
peers. JPMorgan then discounted to present value the free cash flow streams and
terminal free cash flow using discount rates of 17.0% to 23.0%. The discount
rates reflect Mercator's estimated weighted average cost of capital. This
analysis indicated the following per share equity reference ranges after
adjustments for cash and debt:
Management base case................................... $2.10-$3.25
8
TRADING COMPARABLES ANALYSIS
JPMorgan reviewed the publicly available financial data, stock market
performance data and trading multiples of companies in the business integration
software sector that JPMorgan believed to be relevant. JPMorgan deemed the most
relevant trading comparable to Mercator to be SeeBeyond Technology, therefore,
SeeBeyond's trading range of firm value/2003E revenue and 0.6x-0.8x firm
value/2004E revenue was used for valuation purposes. This analysis indicated the
following per share equity reference ranges after adjustments for cash and debt:
$2.10-$2.55 and $2.20-$2.80, based on firm value/2003E revenue and firm
value/2004E revenue, respectively. A list of the relevant trading universe
follows:
COMPANY
Ascential Software
Informatica
IONA Technologies
SeeBeyond Technology
TIBCO Software
Vitria Technology
WebMethods
TRANSACTION COMPARABLES ANALYSIS
JPMorgan conducted an analysis of transactions comparable to the proposed
Ascential-Mercator combination. After reviewing these selected transactions,
JPMorgan observed that the Hyperion-Brio Software transaction was the most
relevant. This transaction was valued at 1.0x firm value/1 year forward revenue.
Using a range of 0.9x-1.1x firm value/2003E revenue, this analysis indicated the
following per share equity reference ranges after adjustments for cash and debt:
$2.55-$3.00. A list of relevant transactions follows:
TARGET ACQUIRER
------ --------
Brio Software............................................... Hyperion
Computer Horizons Corp...................................... Aquent LLC
Caminus Corp................................................ Sungard
Inktomi..................................................... Yahoo
Precise Software Solutions.................................. Veritas Software
InSilicon................................................... Synopsys Inc.
OTG Software................................................ Legato Systems
Talarian Corp............................................... TIBCO Software
PREMIA ANALYSIS
JPMorgan conducted (1) an analysis of the implied premium to be paid to
Mercator common stockholders, (2) an analysis of premia paid in selected
transactions of software companies, (3) an analysis of premia paid in all
public-to-public software transactions over the last twenty-four months and (4)
an analysis of premia paid in all public-to-public software transactions over
the last twelve months.
9
JPMorgan calculated the implied premium to be paid to Mercator common
stockholders based on various prices as of July 31, 2003, one business day
before announcement of the transaction with Ascential, as illustrated by the
table below:
OFFER PRICE
PER SHARE
% PREMIUM TO: PRICE $3.00
------------- ----- -----------
Current..................................................... $2.46 22.1%
30-day "normalized average"(1).............................. 1.56 91.9%
1-week average.............................................. 2.42 24.0%
1-month average............................................. 1.96 52.8%
3-month average............................................. 1.68 79.0%
6-month average............................................. 1.57 90.7%
12-month average............................................ 1.37 118.5%
52 week high................................................ 2.66 12.7%
52 week low................................................. 0.59 408.5%
---------------
(1) Average price for 30 trading days prior to price run-up on July 15, 2003
JPMorgan also noted the premia paid in mergers and acquisitions of software
companies that it believed relevant for its analysis, as illustrated by the
table below:
PREMIUM TO MARKET (TRADING DAYS)(1)
----------------------------------------------
1-DAY 10-DAYS 20-DAYS 30-DAYS 120-DAYS
----- ------- ------- ------- --------
27.2% 26.4% 34.1% 35.9% 75.0%
---------------
(1) Represents premia paid to stock price
JPMorgan also conducted an analysis of premia paid in all public-to-public
software transactions over the last twenty-four months, as illustrated by the
table below:
PREMIUM TO MARKET (TRADING DAYS)(1)
-------------------------------------
1-DAY 20-DAYS 30-DAYS
--------- ----------- -----------
47.2% 53.4% 62.9%
---------------
Note: represents median of all transactions
(1) Represents premia paid to stock price
JPMorgan also conducted an analysis of premia paid in all public-to-public
software transactions over the last twelve months, as illustrated by the table
below:
PREMIUM TO MARKET (TRADING DAYS)(1)
-------------------------------------
1-DAY 20-DAYS 30-DAYS
--------- ----------- -----------
60.6% 34.8% 62.9%
---------------
Note: represents median of all transactions
(1) Represents premia paid to stock price
The preparation of a fairness opinion is a complex process and involves
various judgments and determinations as to the most appropriate and relevant
assumptions and financial analysis and the application of these methods to the
particular circumstances involved. Fairness opinions therefore are not readily
susceptible to partial analysis or summary description, and taking portions of
the analyses set out above, without considering the analyses as a whole, would,
in the view of JPMorgan, create an incomplete and misleading picture of the
processes underlying the analyses considered in rendering its opinion. JPMorgan
did not form an opinion as to whether any individual analysis or factor
(positive or negative), considered in isolation, supported or failed to support
its opinion. In arriving at its opinion, JPMorgan considered the results
10
of its separate analyses and did not attribute particular weight to any one
analysis or factor. The analyses performed by JPMorgan, particularly those based
on estimates and projections, are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by these analyses. These analyses were prepared solely as part of the
JPMorgan analysis of the fairness, from a financial point of view, of the
consideration to be received by the stockholders of Mercator, excluding
Ascential.
Under the terms of its engagement letter dated April 1, 2003 with JPMorgan,
the Board of Directors agreed to pay JPMorgan a transaction fee, reimburse
JPMorgan for certain expenses and indemnify JPMorgan and certain related parties
against certain liabilities, all as discussed under "Item 5 -- Persons/ Assets,
Retained, Employed, Compensated or Used."
JPMorgan has not previously rendered investment banking and financial
advisory services to Mercator, other than in connection with its proxy contest.
JPMorgan may provide financial advisory and financial services to the combined
company and/or its affiliates and may receive fees for the rendering of these
services. In the ordinary course of its business, JPMorgan may actively trade
the securities of Mercator and/or Ascential for its own account and for the
accounts of its customers and, accordingly, JPMorgan may at any time hold a long
or short position in these securities.
ITEM 8. ADDITIONAL INFORMATION
Item 8 of the Schedule 14D-9 is hereby amended by adding the following Item
8(e):
(e) RESULTS FOR THE QUARTER ENDED JUNE 30, 2003
The following table sets forth summary financial data for the three and six
month periods ended June 30, 2002 and June 30, 2003 and is derived from, and
qualified in its entirety by reference to, Mercator's unaudited financial
statements included in its Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003. The information presented below should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
results of Operations" and financial statements and footnotes included in such
Quarterly Report, which was filed with the SEC on August 14, 2003.
11
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licensing................................. $ 6,147 $10,890 $ 13,199 $ 20,439
Services........................................... 5,224 6,901 10,830 14,865
Maintenance........................................ 10,668 9,175 21,099 19,074
------- ------- -------- --------
Total revenues.................................. 22,039 26,966 45,048 54,378
------- ------- -------- --------
Cost of revenues:
Software licensing................................. 67 153 158 277
Services (exclusive of non-cash stock option
re-pricing benefit of $0, $(36), $0 and $(246),
respectively)................................... 4,679 6,065 9,975 13,720
Maintenance (exclusive of non-cash stock option re-
pricing benefit of $0, $(11), $0 and $(73),
respectively)................................... 1,654 1,993 3,313 4,009
Stock option re-pricing benefit.................... -- (47) -- (319)
Amortization of intangibles........................ 961 962 1,922 1,923
------- ------- -------- --------
Total cost of revenues.......................... 7,361 9,126 15,368 19,610
------- ------- -------- --------
Gross profit.................................... 14,678 17,840 29,680 34,768
------- ------- -------- --------
Operating expenses:
Product development (exclusive of non-cash stock
option re-pricing benefit of $0, $(33), $0 and
$(222), respectively)........................... 5,097 5,237 10,131 9,746
Selling and marketing (exclusive of non-cash stock
option re-pricing benefit of $0, $(52), $0 and
$(350), respectively)........................... 7,420 11,893 15,732 23,844
General and administrative (exclusive of non-cash
stock option re-pricing benefit of $0, $(24), $0
and $(176), respectively)....................... 5,486 6,885 11,136 13,648
Stock option re-pricing benefit.................... -- (109) -- (748)
Amortization of intangibles........................ 201 200 401 505
Restructuring charge............................... 4,839 1,308 5,106 1,063
------- ------- -------- --------
Total operating expenses........................ 22,043 25,414 42,506 48,058
------- ------- -------- --------
Operating loss.................................. (8,365) (7,574) (12,826) (13,290)
Foreign currency exchange loss, net.................. (465) (101) (364) (161)
Other expense, net................................... (229) (75) (450) (142)
------- ------- -------- --------
Loss before income taxes............................. (9,059) (7,750) (13,640) (13,593)
Provision for/(benefit from) income taxes............ 151 524 (133) 794
------- ------- -------- --------
Net loss............................................. $(9,210) $(8,274) $(13,507) $(14,387)
======= ======= ======== ========
Net loss per share:
Basic and fully diluted............................ $ (0.26) $ (0.24) $ (0.39) $ (0.43)
Weighted average shares outstanding
Basic and fully diluted............................ 35,205 33,866 35,071 33,721
12
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $19,691 $29,920
Working capital............................................. (6,570) 621
Total assets................................................ 96,213 115,729
Total liabilities........................................... 66,849 73,728
Total stockholders' equity.................................. 29,364 42,001
13
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
MERCATOR SOFTWARE, INC.
By: /s/ Roy C. King
------------------------------------
Roy C. King
Chairman of the Board of Directors,
Chief Executive Officer and
President
Dated: August 26, 2003
14