Level 3 buys Software Spectrum
Level 3, a very big co-lo business, is to buy Software Spectrum, a very big software reseller for $37 per share in cash.
Post-transaction, Level 3 will combine Software Spectrum with Corporate Software, the venerable $1bn t/o sofware reseller which Level 3 bought in March for $89m cash and $50m in assumed debt. That purchase bulked up Level 3's business sufficiently for it to avoid breaking bank covenants through until at least mid-2003.
Software Spectrum shareholders accounting for 28 per cent of the share capital already say that will vote for the deal.
This transaction may make sense for Software Spectrum as it did for Corporate Software, But what is Level 3 playing at? It's worth printing the company's statement, attributed to James Q. Crowe, CEO, in full.
"Over the past few months Level 3 has moved to significantly expand its information services business. We are doing so in order to take advantage of important economic and technology trends, including the continuing convergence of the broadband and software distribution industries. The agreement announced today is a key part of that effort. Software Spectrum is one of the nation's leading providers of software products and related services to Fortune 500 enterprises and other businesses. We believe that integrating their operations with those of our recently acquired Corporate Software subsidiary will deliver a number of short and long term benefits to our company and create value for our shareholders."
Convergence of broadband and software distribution industries? Does Crowe know something the rest of the world doesn't? Software distribution may carry better margins than web-hosting - but only just.
Under the terms of its banking agreements, Level 3 has to produce a hefty level of sales growth, which is simply not possible with today's prices and oversupply for co-lo and web hosting services. By buying software resellers, the company can bulk up relatively cheaply - Corporate Software is acquired at just 14 per cent revenues, and the debt element doesn't have to be squared off immediately.
Level 3 of course denies that its acquiring companies simply through financial contingency. One day, all corporations will be buying or renting all their software over the net, or so the argument goes, hence the convergence of bandwidth and software distribution. It's gonna be an ASP world out there.
Yes, but is it necessary for the telcos to go, buy software resellers? No. Unless you are Level 3. ®