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JDA & i2 Part Deux or The ‘New Normal’ for Tech M&A Deals

Last week JDA announced that it had reached a definitive agreement to acquire i2 for $18.00/share.  When coupled with the retirement of i2’s preferred equity the total value of the deal is $556 million.  What is interesting about the deal is its creative structure in comparison to the practically all debt deal JDA launched and then walked away from last December.  The new deal structure is composed of three components: cash, JDA equity, and new debt.  What is interesting is that the debt component is only 40% of the total consideration and represents less than a 1.56x Total Debt/Restructured EBITDA ratio.

You may recall that JDA attempted to acquire i2 in late 2008 for $14.86/share.  The initial deal was going to be primarily financed by new debt and the cash on i2’s balance sheet.  Credit Suisse and Wachovia committed $450 million in new senior debt to finance the deal.  Unfortunately, the implosion of the credit markets was reaching its peak in late 2008 and eventually the banks balked at financing the deal.  JDA walked away from the deal in early December by paying i2 a $20 million termination fee when they were unable to get i2 to agree to a price reduction to get the deal done.  When the JDA – i2 deal blew up it pretty much marked the end of the covenant-lite debt fueled M&A frenzy that had consumed the technology market since 2006.

Now, barely eleven months later the marriage between the two supply chain management specialists is back on.  The new deal has a fairly creative structure that is designed to significantly mitigate any risk to closing the deal.  The new structure is also an excellent example of how technology M&A deals are going to be structured going forward in the post Great Recession economy.

JDA & i2 have done an excellent job communicating to investors, analysts, and employees about this deal.  Regulation FD does provide some advantages for folks that want to understand complex transactions like this without wading through thousands of pages of regulatory filings.  You can see the complete set of JDA-i2 presentations here through this SEC EDGAR link.  The following slide from their investor presentation summarizes the proposed structures for the deal:

 jda 1

jda 2 

The proposed deal is 21% higher than the offer JDA made in 2008.  To mitigate the legitimate concerns that JDA will be unable to finance the deal, JDA has proposed two potential structures for the deal.  The consideration in the first structure is 38% cash, 20% JDA stock, and 42% new debt.  JDA believes that they can raise the $275 million in new debt at acceptable rates in today’s credit markets.  In the vent that JDA cannot raise the debt by early December, they will shift to the ‘alternative structure’ which is composed of 40% cash, 40% JDA equity, and 20% new debt.  JDA has already a commitment letter from Wells Fargo to fund the ‘alternative structure.’

JDA is planning on some minimal cost synergies for the deal of approximately $20 million as shown in the following slide:

 jda 3

A preliminary analysis of these synergies indicates that JDA is planning on eliminating around 120 jobs from the combined company: 35 in G&A, 58 in Sales & Marketing, and 27 in R&D.  From a debt metric perspective primary deal structure the deal looks very fundable.  With $179 million in combined EBITDA represents only a 1.56x leverage ratio.

The valuation metrics JDA is paying for i2 are well in line with similar transactions from over the past year, as shown in the following two charts:

 jda 4

 jda 5

At the end of the day, the JDA-i2 deal is a great deal for both JDA and i2.  The combined company will have unmatched scale in the supply chain management application space and a global ability to execute.  The deal terms reflect the reality of the new age of tech M&A deals:  cheap debt can no longer be used as the exclusive acquisition currency and acquirers will need to leverage more of their own equity and cash to get transactions done.

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