Buyer pays a good price for Davidson firm.

Davidsons will remain at helm of Torrance operation

Last week's announcement of a planned billion-dollar acquisition of Torrance-based Davidson & Associates Inc. represents a startling example of the escalating prices being paid for up-and-coming software developers, according to Wall Street analysts.

CUC International Inc., based in Stamford, Conn., said Feb. 20 that it would issue 0.85 shares of its common stock for each share of Davidson stock. At market prices before the deal was announced, that meant CUC was paying $31.88 a share for a stock that was selling for only $18.50.

Wall Street responded to the announcement by diluting the value of CUC, which fell from $37.50 a share before the deal was announced to $31.25 by market close on Feb. 20.

However, it had rallied to $33.63 by closing on Feb. 22. Davidson stock, meanwhile, rose from $18.50 on closing Feb. 19 to a close of $27 on Feb. 22.

"The list of companies out there that are successful in the software business is declining, because people are acquiring them, and that's why they're costing so much now," said Lee Isgur, managing director of San Francisco-based investment bank Jefferies & Co. Inc. "Prices (paid for software companies) have nothing to do with what's reasonable. That's just what it costs to get them."

The precipitous fall of CUC stock could endanger the acquisition if it continues; under the terms of the deal, Davidson can back out if CUC shares fall below $29.

Davidson is a rapidly growing educational and entertainment software company founded in 1978 by former school teacher Jan Davidson. Now president, she recruited husband Bob to run the company in 1989 after the launch of the company's most successful product to date, a teaching program called "Math Blaster." Bob Davidson is now chairman and chief executive officer.

Autonomy pledged

Between them, the Davidsons own about 74 percent of the outstanding shares of their company.

Under the terms of the deal with CUC, Davidson & Associates will remain an independent division based in Torrance, and the Davidsons will continue their management roles with the company as well as sitting on the board of directors at CUC - where, when the deal is final, they will become the largest shareholders, according to Bob Davidson.

"There's a lot of consolidation happening in our business, and we knew that we ultimately were going to have to play some kind of a role in that consolidation" Bob Davidson said. "To put it crudely, (Davidson and CUC) are each traveling down adjacent lanes on the information superhighway."

Davidson has been growing quickly since 1990. Although figures for 1995 have not yet been released, Wall Street estimates place the company's revenues at nearly $150 million last year compared with $88 million in 1994. Yearly earnings are estimated at 36 cents a share in 1995 versus 26 cents in 1994.

Bob Davidson said the company will meet or beat the 1995 estimate when figures are issued.

The Davidson deal was only part of a huge day of acquisitions for CUC, which also said it was buying Bellevue, Wash.-based software developer Sierra On-Line Inc. in another stock swap worth $1.06 billion based on CUC's stock price before the deal was announced.

Finally, CUC said it would acquire San Francisco-based Rent Net, a service that lists apartments on the Internet, for about $3 million.

Fueled by fees

CUC is a Fortune 500 company that performs a home shopping service for more than 40 million members. In exchange for an annual fee, members of CUC's 16 services pay discount prices for consumer products, travel packages, meals and other goods supplied directly by manufacturers. CUC owns neither stores nor inventory, earning its revenues solely through membership fees.

Laura Plevyak, the company's vice president of investor relations, said CUC sees numerous opportunities in the software industry. Besides using its new aquisitions to beef up its Internet presence, CUC will be able to use its membership base and its distribution networks to sell software developed by Sierra On-Line and Davidson.

As for the negative reaction from Wall Street, Plevyak said CUC will regain its market value once investors see the benefits of the new acquisitions.

"It's not surprising, when you make two $1 billion transactions in one day, for the market to react that way," Plevyak said. "We're not running this company for the next two or three quarters. We're looking at what's going to happen five years out."