Irish educational software firm, Riverdeep, has significantly strengthened its position in the lucrative US children's education market after computer giant, IBM, took a 14 per cent stake in the company yesterday. IBM's shareholding came about when Riverdeep acquired the entire assets of IBM subsidiary, Edmark Corporation.
As part of the deal, Riverdeep will issue 4.6 million new American Depositary Shares (ADSs) to IBM, valued at $85 million (€91.7 million), in exchange for the assets of Edmark. Riverdeep's share price on the US Nasdaq was little affected by the US, closing up 38 cents at $19.12. Investors are likely to hold off until Riverdeep issues its quarterly financial results tomorrow.
Edmark, which was set up over 30 years ago publishes more than 50 educational titles for the US K-8 (kindergarten to eighth grade) market. With a customer base of 46,000 schools and a leading position in the special needs market, its addition to Riverdeep's product portfolio will enhance Riverdeep's penetration in the US children's education market, where it currently focuses on the K-12 (kindergarten to 12th grade) market.
IBM purchased Edmark in late 1996 in a $130 million cash deal, and since then it is understood to have invested around $40 million in the group. Through the $85 million stock-for-assets deal with Riverdeep, IBM is banking on Riverdeep's share price rising to at least $40 if it is to recoup Edmark's estimated real value.
"Edmark is an ideal strategic and operational fit for Riverdeep. Edmark's extensive customer base combined with our current reach will enable us to achieve significant penetration of US schools," Riverdeep chief executive officer, Mr Barry O'Callaghan said.
The addition of Edmark's products will also significantly increase Riverdeep's revenues of $6.9 million for the 12 months to the end of March 2000. Edmark is currently recording annual revenues of $20 million on breakeven profits. According to Mr O'Callaghan Edmark's operations should become "cashflow positive" immediately following the deal.
However analysts have warned that Riverdeep now faces a considerable challenge over the next six months to convert all of Edmark's 57 CD-Rom software titles to Internet format, and change the business model from a licensed based one to a subscription based one.
"This is a further example of Riverdeep's strategy of regularly changing the rules of the game in order to stay one step ahead. Riverdeep is also moving towards establishing a network for professional development, because Web-enabled products allow teachers measure student progress and teacher efficiency online. That is a real competitive advantage," says Mr John Coolican, head of technology research at Merrion Capital stockbrokers.
With the deal, Riverdeep adds 140 Seattle-based employees - including 90 software developers - to its 200-strong team.
The educational software industry is currently going through a period of huge consolidation as traditional players struggle to keep up with smaller, more nimble Internet players.
On Monday, Pearson Group acquired National Computer Systems (NCS) in a $2.5 billion deal.
