The Cost of Doing Right

There's little assurance another buyer will emerge with as generous an offer

Aveva Slumps as Deal Founders

Source: Bloomberg

Doing the right thing can be expensive, something British engineering software company Aveva is demonstrating to its shareholders' cost.

Aveva walked away from away from a complex reverse takeover by Schneider Electric on Tuesday, sending the shares down 35 percent. Aveva's managers realized the deal would be more complex and costly to execute than thought when it was announced.

The prospect of 550 million pounds ($833 million) in cash, equivalent to about 855 pence a share, was certainly attractive to Aveva investors, but its managers would have been reckless to accept a minority stake in the combined company if they had concluded shareholder returns risked dilution.

In asset-light businesses like software companies, there's little room to cut costs. Benefits from cross-selling can always be eaten up by integration costs. CEO Richard Longdon may have wasted time on the deal, but at least his shareholders won't have to pay a break fee.

He's still left with the bigger problem of what to do next. The company said on Tuesday that trading remains in line with the board's expectations and its full-year outlook is unchanged.

Unfortunately, Aveva's core market -- oil & gas -- still accounts for more than a third of revenue. While that's down from 45 percent a year ago, that segment will remain under pressure as long as the price of oil continues its relentless decline.

Aveva's Ebitda Margin

Source: Bloomberg data

Aveva has so far been able to defend its Ebitda margins, but revenue in the first half fell 5 percent and analysts expect it to stagnate in 2016. The company is trying to broaden its customer base to include food-processing and building information-management systems, but these efforts will take time to pay off. Analysts have been cutting their earnings estimates for 2016 in recent weeks.

Aveva's Stagnating Revenue Growth

Source: Bloomberg data

It's possible another suitor may emerge: the company now trades at about 20 times estimated earnings, less than its historic average. For shareholders, Aveva's market value is more-or-less unchanged on its 2011 level.

On paper, it's a tempting target. But with oil near $35 a barrel, there's scant assurance any future offer will be generous or simple enough to bring Aveva back to the negotiating table. Longdon should focus on explaining how doing the right thing today will pay off in the long term for shareholders.

    This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Chris Bryant in Frankfurt at

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    Edward Evans at

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