By Jason Stamper

Once again at the eleventh hour Compuware Corp has extended its tender offer for the proposed $168m acquisition of Viasoft Inc. The offer was due to expire on November 29 but the company issued a statement that day saying that it has pushed the date back yet again, this time to December 20 due to the pending civil lawsuit against Compuware filed by the Department ).

Bret Wacker, senior counsel for Compuware told ComputerWire that Compuware is still in negotiations with the DoJ. A settlement hearing between the DoJ and Viasoft was held on December 3rd, and a scheduling hearing was due to be held on December 4 in the US District Court House in Washington DC. Wacker said that the hearing was intended for the judge to ascertain the status of negotiations and either ask the parties to return to the negotiating table, or set schedules for depositions, discovery, and a trial date. The preliminary trial date is April 4, 2000, though this could be changed at the scheduling hearing.

Since the announcement of the Compuware deal Viasoft says its business, results of operation, financial condition and liquidity have been materially adversely affected. It also says that revenues have dwindled as customers delay or reconsider buying from the company, and it has seen, significant employee attrition as a result of the announcement of the Compuware transactions. The figures suggest that Viasoft is right – in its latest quarter ended November it reported total revenues of $18.6m, compared to $25.3m for the same period last year.

The deal was first announced on July 14, and was due to expire on October 12. But Compuware failed to get the necessary regulatory approval, and extended the offer until October 29. Then the DoJ filed the civil suit against Compuware, saying that the merger would boost the price of software testing and fault management tools for the mainframe market – a market in which Compuware has the highest market share and Viasoft is number two. Compuware duly extended the expiration to November 29, and then again to December 20.

At the time of the first extension, 80% of Viasoft’s common shares had been tendered and not withdrawn, and by the time of the next extension it was up to 89%. But since then stock holders have clearly started to get the jitters about the deal. On November 5 the percentage of shares tendered had fallen to 82%, and by November 29 only 76% of shares remain tendered. That means that since October 29 2.3 million shares have been withdrawn from tender. Compuware needs a majority of the shares to be tendered to comply with the merger agreement.

Wacker told ComputerWire that on December 2 the DoJ tried to negotiate a resolution to the civil lawsuit with Compuware and Viasoft that would be acceptable to all parties. It’s not clear what that resolution could be. But it’s possible the DoJ would allow the acquisition if Compuware gave certain assurances that it wouldn’t force up prices through its dominant position in the mainframe testing and fault management market. Compuware and Viasoft would obviously prefer to reach such a resolution rather than litigating the suit in court, with the concomitant expense, and delay. Wacker still insists that Compuware is prepared to go to trial if necessary.

We are currently in the process of reviewing our options with counsel, said Peter Karmanos Jr, Compuware chairman and CEO at the time of the filing of the suit by the DoJ. The Department’s press release completely mischaracterizes the marketplace for our software products. The DoJ has made it clear they don’t understand what our products do or the dynamics of the mission-critical software marketplace. Unfortunately, they’ve compounded their error by choosing to file this lawsuit.

In its complaint the DoJ had said that: Compuware is the world’s dominant producer of mainframe testing and debugging software (test/debug software), with no less than 60% of the market. For a substantial number of users, Viasoft is Compuware’s closest competitive alternative (and, many users believe, its only real competitor) offering comparable functionality and performance. Viasoft has competed by targeting Compuware customers and offering better prices and more flexible licensing terms, as well more responsive customer service and support.

Also in the complaint the DoJ described a Compuware internal memorandum, describing feedback received from a number of customers at a 1998 technical conference, in which Compuware was told by many customers, that our products are too expensive, that our upgrade charges are unreasonable (we heard words like ‘gouge,’ ‘arrogant,’ and ‘disdainful’). To gouge, incidentally, means to obtain through coercion or intimidation. The memorandum also allegedly stated that several of the customers indicated that they are actively seeking replacements for Compuware products because of our prices.

According to Compuware management, if the acquisition goes through it is expected to be accretive to its March quarter 2000, by $0.01 and by $0.03-$0.04 for year-end March 2001. Compuware reported $1.6bn in revenue for 1999, equating to net income of $193.94m. Its shares are at $32 giving it a market cap of $11.7bn. Viasoft, meanwhile, had revenue this year of $104m (Compuware’s bid price/sales ratio is 1.61), but it made a net loss of $8.49m, which it attributes in part to the Compuware deal.

This article is extracted from the latest edition of ComputerWire’s weekly M&A Impact news and analysis service.