Two troubled interactive shops will become one, ideally less-troubled firm, following the proposed merger of Scient Corp. and iXL Enterprises.
Through the all-stock merger agreement, Atlanta-based iXL will become a subsidiary of New York-based Scient. The companies did not disclose a dollar figure for the merger, though at their latest market prices, iXL and Scient are trading at valuations of about $76.4 million and $46.3 million, respectively.
Technically, the agreement calls for a “merger of equals,” with Scient and iXL both becoming units of a new parent company named Scient. Through the deal, existing Scient shareholders will get 0.31 shares of the new company’s stock, while iXL investors will receive 0.25 of a share.
To some observers, the deal reflects the viability of each company’s business, even though iXL generally sees more quarterly revenue and smaller losses, and has a larger market cap (as of this writing). But Scient on Tuesday reported $68.75 million in cash remaining, while iXL has about $25.6 million left — at current burn rates, Scient theoretically could outlast iXL by half a year.
Nevertheless, executives reaffirmed the notion of the merger being a combination of two equals. iXL chief executive Christopher Formant told investors during a conference call Tuesday morning that the exchange ratio doesn’t reflect respective company valuations — rather, its lopsidedness reflects the value of options.
“It’s as close to 50-50 as we possibly could,” he said. “It’s the proper ratio to use, given what we think will happen with the options.”
Following the deal — which is subject to shareholder approval and is slated to close in fourth quarter — Scient chairman and chief executive Bob Howe will retain the chairman position in the new company. IXL’s Ellis will become vice-chairman, while Formant will become CEO. Scient chief operating officer Stephen Mucchetti and iXL chief financial officer Mike Casey will both retain their previous titles.
The merger aims to create some stability in the turbulent market for interactive consultants and agencies — a once high-flying industry that’s borne much of the brunt of the economic downturn, with layoffs affecting all the players in the space, including names like Razorfish, Agency.com and the now-defunct marchFIRST.
But iXL, for one, has responded to the downturn by painting itself as a successor to top consultancies like Accenture and Cap Gemini Ernst & Young, lately tapping a stable of executives from those companies to oversee a turnaround in its own fortunes.
Formant, too, is still fond of evoking the idea that iXL (now Scient) will compete for business with the Big 5 consultancies — who are rapidly moving into Web design, strategy and back-end implementation.
“The combination of Scient and iXL is intended to create one of the leading consulting firms in the world with a strong combination of resources, market focus and culture,” Formant said.
To that end, spokespeople pointed to nuanced “synergies” that would result from the merger, and which would address what they said were underserved areas of the market. For one, executives described Scient has offering clients “extensive strategy and architect design expertise,” while iXL trades in “powerful and competitively priced development and implementation.”
While the exact differences in service offerings remain unclear, the merged company evidently will enjoy more concrete bottom-line benefits, from consolidating real estate and technology infrastructure. iXL chairman U. Bertram Ellis said the combined company should save about $100 million annually through the combination.
Ellis added that had the two companies been operating as a joint entity during the past quarter, it would have posted a $3 million profit.
But instead, Scient posted a pro forma loss of $14.8 million (or $0.20 per share) on $11.3 million in revenue this quarter, while iXL saw a pro forma loss of $9.8 million (or $0.10 per share) on $32.7 million in revenue.
Both iXL and Scient improved over last quarter’s results — posting a $0.18 and $0.22 per share reduction in losses — but Scient missed Wall Street estimates of a $0.11 per share performance, according to Thomson Financial/First Call.