Why has the publicly-quoted CBT group - a company founded by Mr Bill McCabe - decided to acquire the privately controlled Knowledge Well - a company founded by Mr Bill McCabe?
When Knowledge Well was formed two years ago it was offered to CBT, but the CBT board (excluding Mr McCabe) turned it down. Had CBT accepted that offer then, Knowledge Well would now be an integral part of CBT, for just the set-up costs. Now CBT has announced an agreement to buy the company for $52 million, payable in CBT shares.
That consideration was arrived at by the proposed issue of 4.8 million CBT shares which puts a price of $10.8 on the CBT shares. But the share jumped $2.50 to $12.42 in heavy trading one day before the announcement and reached almost $17 before closing at $16.63 on Friday. That puts a value of almost $80 million on Knowledge Well.
Yet CBT has always contended that the two companies are in two separate markets; CBT providing software to train people in information technology, and Knowledge Well providing management and university training software. Now Mr McCabe talks about the businesses being complimentary . This is what he said when he announced the proposed acquisition and major management changes: "CBT Group is acquiring a very attractive and complementary franchise. In addition, this acquisition enables us to reinvigorate CBT Group's executive management, which is critical to building the franchise in interactive education that we believe CBT Group can become."
Asked about the profitability and sales of Knowledge Well, a spokeswoman for CBT said there was "no significant revenue at this time". Although Knowledge Well was just beginning, "we are extremely excited", she said.
However, it is pretty obvious Knowledge Well, based in Dundrum, Dublin, is being purchased at a substantial premium to its net assets and the acquisition will dilute CBT's earnings. BancBoston Robertson has reduced its earnings estimate for 1999 from $0.40 to $0.28 due to the additional goodwill associated with the acquisition.
Mr McCabe, who sold around $40 million worth of CBT's shares last year before the share price collapsed (they reached a high of $63.87 and a low of $6.72), has also indicated his intention to make a significant purchase of CBT shares. Asked to quantify this, the spokeswoman has, so far, not provided an answer. Nevertheless shareholders will have the right to vet the deal as their sanction is needed for approval.
But the prospectus detailing the proposed deal is unlikely to provide meaningful fodder to assess the merits of the deal. The historic data will not be that important; it is the future that will count. But the proposed management changes are impressive. Mr McCabe, Knowledge Well's chairman, will take back the chairmanship of CBT. Not much change there as he had retaken the reins of CBT two months ago, following the collapse in its share price and the stepping down of its two most senior executives: the then chairman and chief executive, Mr Jim Buckley, and its then chief financial officer, Mr Riachard Okumoto. But his position has now been formalised, and that is good. A positive move is the proposed transfer of senior executives from Knowledge Well to CBT who had formed the core which had driven CBT. Mr Greg Priest, Knowledge Well's CEO, takes over as CEO CBT. Two others, Mr Bill Beamish and Mr Jeff Newton, formerly with CBT, are also to join the new CBT executive team.
Other moves in the right direction are the covenants signed by the main executives not to compete. Such an agreement might have forbidden the exodus from CBT two years ago to set up Knowledge Well, though CBT has always contended the companies, even though they are both in educational software, do not compete. In addition, those executives who are getting CBT shares for their holding in Knowledge Well, have agreed to keep the shares for at least one year.
They now appear to have all their eggs in one basket and that is the way it should be. CBT still has numerous class actions pending against it. However, the latest package should go more than a little way to restoring confidence in the company which, not so long ago, was seen as a guiding light to entrepreneurs with goals to gain a share quotation on Nasdaq.
