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Struggling WebMethods Finds a Buyer in Germany

By David S. Hilzenrath
Washington Post Staff Writer
Friday, April 6, 2007

WebMethods, the Fairfax software company that has struggled since it was a darling of the dot-com era, has agreed to be bought by the German company Software AG for $546 million.

At $9.15 per share, the deal would offer WebMethods stockholders a premium of 25.7 percent over Wednesday's closing price of $7.28.

But it is a long way from the heady days of 2000 when the company's shares traded above $308, making the 30-something couple who founded the business in the basement of their Burke townhouse worth more than $1 billion on paper. Back then, WebMethods bought another company for $1.3 billion.

Co-founder Caren DeWitt left WebMethods in 2000 to focus on philanthropy, and her husband, Phillip Merrick, resigned as chief executive in 2004 citing health reasons that company officials said were related to stress.

WebMethods, which has lost more than $300 million since 1997, turned the corner to profitability in the fiscal year ended March 31, 2006. But after falling short of Wall Street's earnings expectations, it suffered a steep decline in its stock price last summer, from which it has not fully recovered, making it a less expensive acquisition target.

"At the end of the day, we are a public company, and we have to pay attention to the fiduciary duties of the shareholders," said David Mitchell, chief executive of WebMethods.

Mitchell said that there was substantial interest in the company and that the deal with the German software firm was the most compelling option.

"From a management-team perspective, there was a strong cultural fit," Mitchell said.

The deal, which is subject to regulatory and shareholder approval, would expand Software AG's presence in North America, where it now derives a quarter of its revenue. WebMethods earns 62 percent of its revenue in North America.

Asked whether any WebMethods employees would lose their jobs as a result of the deal, as often occurs after mergers, Karl-Heinz Streibich, chief executive of Software AG, said: "We have no reduction plans at the moment, not on the Software AG side and not on the WebMethods side."

"It is a strategy for growth, and the efficiency will be increased through the growth," Streibich said.

WebMethods software helps businesses manage their work flow.

If the proxy report the company filed with the Securities and Exchange Commission last year provides an indication, the $9.15-per-share buyout price would leave many WebMethods stock options out of the money. Options give employees and other holders the right to buy shares at a set price and sell them at a profit if the market price is higher. As of June 30, 2006, outstanding WebMethods options had a weighted average exercise price of $10.67, according to the filing.

In heavy trading yesterday, WebMethods' share price rose 27 percent, to $9.26.

Measured as a multiple of expected revenue for fiscal 2008, the offer price was on the low end of recent mergers in the software industry but is nonetheless fair "given WEBM's [WebMethods'] poor fundamentals and inconsistent execution," analysts at Friedman, Billings, Ramsey Group, an Arlington investment firm, wrote in a report to investors.

"We do not anticipate a competing bid, as we believe WEBM has been on the block for a while and this deal was probably shopped around fairly well," the report said.

In a news release, the companies predicted the deal would close in the second quarter of 2007.

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