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The boards of Orc Software AB (“Orc”) and Neonet AB (“Neonet”) have decided to propose to the shareholders a merger to create a global player in technology and services for advanced trading in financial instruments. This is accomplished by Orc making a public offer to the shareholders in Neonet. Orc has technology for derivatives trading and connectivity and Neonet has solutions and technology services for equity trading. The merger will generate valuable synergies above all on the income side – but also with regard to costs – which combined are expected to improve the operating income by SEK 130 million annually.
The board of directors of Orc has decided to make a public offer (“the Offer”) to the shareholders in Neonet to transfer their shares in Neonet to Orc in return for payment in the form of newly issued shares. Orc is offering 0.125 new Orc shares for each share in Neonet. . The new shares will not grant entitlement to dividends until after Orc’s proposed dividend of SEK 10 per share for 2009 has been paid. The Offer, adjusted for the proposed dividend in Orc, represents SEK 19.625 per share in Neonet, which constitutes a bid premium of 22 percent based on the closing prices paid on NASDAQ OMX Stockholm on January 22. The total value of the Offer amounts to approximately SEK 1,277 million per closing prices on January 22. The Offer is conditional, among others, upon the requisite decisions by the extraordinary general meeting in Orc to enable the issue of new shares as consideration in the Offer.
The board of directors of Neonet stands behind the Offer and unanimously recommends that it be accepted by the shareholders1. Shareholders in Neonet representing 50.15 percent of all shares in the company have pledged to accept the Offer.
- Through the merger between two leading providers of technology and services for financial trading, we will create an even stronger global player in this area,” says Thomas Bill, CEO of Orc. By joining forces, the merger will enable us to develop better technology, faster and at a lower cost. Following a period of powerful growth in Orc, this transaction will ensure access to a significantly larger potential market for the future group and thus create the conditions for continued strong growth.
- Neonet and Orc complement each other very well. Orc is a leader in solutions for advanced derivatives trading and connectivity. In combination with Neonet’s strong portfolio of equity trading and hosted technology solutions, we will create an extremely attractive customer offering,” says Simon Nathanson, CEO of Neonet.
BACKGROUND AND MOTIVE FOR THE OFFER
The market for technology and services for advanced trading in financial instruments is characterized by powerful growth and rapid change. This creates development opportunities, above all for the established suppliers. At the same time, suppliers are under growing pressure to continuously develop their offering as a means to stay competitive. The customers demand continuous performance enhancements, more market connections, more integrated trading tools (such as smart order routing, basket trading, algorithms and support for automated trading) and opportunity to trade across multiple asset classes. In addition, there is a rising demand for integrated solutions for equity and derivatives trading. Furthermore, customers are increasingly seeking alternative delivery models; partly in the form of hosted technology solutions and partly as technology integrated in an execution service. All in all, this is placing rigorous requirements on development and product offering for players aiming for a leading position in this market. The proposed transaction should be viewed with this context in mind.
Orc and Neonet are both leading technology suppliers to players in their respective niches of the financial market. The operations complement each other well in terms of market and product offering. Orc’s technology is focused on derivatives trading, while Neonet’s is focused on equities trading. The merger will create a company that offers customers leading technical solutions and services for advanced trading of derivatives and equities.
The merged group will offer the world’s fastest and most comprehensive market connections and a transaction network covering all leading exchanges, as well as alternative marketplaces such as MTFs and dark pools. The new group will have a strong technology platform with the bulk of product development and management in Sweden, but approximately 90 percent of sales on international markets. Growth remains high in all markets.
After the merger the new group will consist of two parts; Technology and Transaction Services.
Technology will offer Orc’s and Neonet’s technology solutions, in the form of licenses according to Orc’s current business model and via hosted technology solution. Technology generates recurring revenues with a high degree of predictability and will thereby constitute the base of operations.. In 2010, Technology is expected to account for approximately 60 percent of the new group’s turnover.
Transaction Services offers an independent global execution network for equities and derivatives. Transaction Services will be offered with a variable business model and in 2010, Transaction Services is expected to account for approximately 40 percent of the turnover.
The recurring revenues within Technology creates conditions for a minimum operating margin of approximately 20 percent in the new group and combined with the variable revenues within Transaction Services creates the conditions for an operating margin that can exceed 35 percent..
The companies consider there to be significant synergies in the proposed constellation, partly through efficiency gains but above all by combining the companies’ product offerings and aggregate expertise. These synergies are expected to reach full effect in 2012 at the latest, at which time the total cost and income synergies are expected to increase the operating income by more than SEK 130 million annually, of which around one third is attributable to cost synergies expected to reach full effect in 2011 at the latest, which means that the transaction is expected to result in increased earnings per share for Orc’s shareholders in 2011.
The transaction will give rise to certain non-recurring expenses for restructuring of operations and transaction costs. All in all, these expenses will amount to approximately SEK 70 million and will arise during 2010.
The board of directors of Orc has proposed to the annual general meeting a dividend of SEK 10 per share for 2009. The transaction will not affect the board’s proposed dividend for 2009.
THE OFFER
For each share in Neonet, the shareholder is offered 0.125 new shares in Orc, which means that the shareholders in Neonet will receive one newly issued share in Orc for each full eight count of shares in Neonet. Shareholders whose holdings are not evenly divided by eight may accept the Offer for their entire holding, including excess shares. To the extent that this results in shareholders receiving a fraction of a share in Orc, this fraction will be added to other such fractions and sold on NASDAQ OMX Stockholm, after which the shareholders will receive cash payment for their respective fractions of the total sales proceeds.
The newly issued shares grant the right to dividends starting in respect of the fiscal year 2010. Hence, the new shares will not grant entitlement to dividends until after Orc’s proposed dividend of SEK 10 per share for 2009 has been paid. The Offer will be adjusted if Neonet pays a dividend or makes some other value transfer to the shareholders before the settlement date within the framework of the Offer.
Alternatively, shareholders with a holding of not more than 599 shares in Neonet are offered a cash amount of SEK 19.625 per share in Neonet.
No brokerage fees are payable in the Offer.
The Offer represents, adjusted for the proposed dividend of SEK 10 in Orc, a premium of 22 percent compared to the closing price paid for the Neonet share on NASDAQ OMX Stockholm prior to the suspension of trade on January 22, 2010, and of 30 percent compared to the closing price paid on January 21, 2010, and of 27 percent compared to the volume-weighted average price for the Neonet share on NASDAQ OMX Stockholm during the last thirty trading days. The total value of the offer amounts to SEK 1,277 million. If the Offer is accepted in full, a maximum of 8,133,264 new shares in Orc will be issued, after which the existing shareholders in Neonet will together hold shares corresponding to not more than 35 percent of the votes and share capital in Orc.
RECOMMENDATION FROM NEONET’S BOARD OF DIRECTORS
The board of directors of Neonet considers that a merger with Orc is an industrially sound transaction with the potential for significant synergies that will create a strong player in the area of “transaction services” for the financial market and good opportunities to sell Neonet’s technology through Orc’s global sales organization. The board of directors has therefore decided to recommend that the shareholders accept the offer from Orc. This recommendation is based on an overall assessment of the terms of the Offer and the anticipated effects arising from a merger with Orc2. The board of directors has also obtained a valuation report from ABG Sundal Collier AB which deems the Offer to be reasonable from a financial perspective.
ORC’S OWNERSHIP IN NEONET AND UNDERTAKINGS ON THE PART OF THE SHAREHOLDERS IN NEONET
Shareholders in Neonet representing 50.15 percent of all shares in Neonet have pledged to accept the Offer on the condition that no more advantageous offer is made. Orc currently holds no shares in Neonet.
CONDITIONS FOR THE OFFER
The conditions for completion of the Offer are:
- that the Offer is accepted to such an extent that Orc becomes the owner of more than 90 (ninety) percent of the total number of shares in Neonet;
- that the extraordinary general meeting in Orc passes the requisite decisions to enable the issue of new shares as consideration in the Offer;
- that no other party announces an offer to Neonet on terms that are more advantageous to Neonet’s shareholders than those applicable under the Offer;
- that all requisite, governmental and similar permissions, approvals, decisions and other clearances for the Offer and the acquisition of Neonet, including the Swedish Financial Supervisory Authority and the competition authorities, have been obtained on terms that are acceptable to Orc;
- that Orc, in addition to what has been disclosed by Neonet or in some other way communicated in writing to Orc before the date for public announcement of the Offer, does not discover that information which has been disclosed by Neonet or in some other way been provided to Orc is incorrect or misleading in any significant respect, or discover that information about significant circumstances that should have been disclosed by Neonet have not been disclosed;
- that neither the Offer nor the acquisition of Neonet is wholly or partly prevented or materially adversely affected by legislation or other regulation, court decision, public authority decision, action or similar circumstances that exist or can be reasonably expected to arise, that are beyond Orc’s control and which Orc could not reasonably have anticipated on the date for public announcement of the Offer; Press Release January 25, 2010 6 (10)
- that no circumstances of which Orc had no knowledge on the date for public announcement of the Offer have occurred that have a material adverse effect on, or can be reasonably expected to adversely affect, Neonet’s sales, income, liquidity, equity or assets; and
- that Neonet does not take any actions that are intended to impair the conditions for completion of the Offer.
Orc reserves the right to withdraw the Offer in the event that it becomes clear that any of the above conditions has not been fulfilled or cannot be fulfilled. However, with regard to conditions 3 – 8 above, such withdrawal will take place only if such non-fulfillment is of material significance for Orc’s acquisition of shares in Neonet.
Orc reserves the right to waive, wholly or partly, one or more of the conditions stated above, including, with regard to condition 1 above, completion of the Offer in the event of an acceptance level of less than 90 percent.
The Offer will be financed with newly issued shares in Orc. The Offer is conditional on the requisite decision by the general meeting of shareholders in Orc to enable the issue of new shares as consideration in the Offer.
PRELIMINARY TIMETABLE
Extraordinary general meeting in Orc February 16, 2010 Publication of the Offer document March 8, 2010 First date for acceptance of the Offer March 11, 2010 Final date for acceptance of the Offer April 1, 2010 Settlement date April 7, 2010 (All dates are preliminary and are subject to change.)
Orc reserves the right to extend the acceptance period and to postpone the settlement date. The acquisition of Neonet is subject to approval from the Swedish Financial Supervisory Authority and possibly also from the competition authorities. Assuming customary handling by each respective authority, notice is expected to be received from both the Swedish Financial Supervisory Authority and, where pertinent, from the competition authorities, before the end of the acceptance period.
Additional descriptions of Orc and Neonet, aside from those in the upcoming offer document, can be found on Orc’s and Neonet’s websites “www.orcsoftware.com” and “www.neonet.com”.
MANDATORY REDEMPTION AND DELISTING
As soon as possible following Orc’s acquisition of shares representing more than 90 percent of the shares in Neonet, Orc intends to request mandatory redemption of the remaining shares in Neonet. In connection with this, Orc intends to apply for delisting of the Neonet share from NASDAQ OMX Stockholm.
DUE DILIGENCE
In preparation for the Offer, Orc and Neonet have performed due diligences on Neonet and Orc. In connection with this, both companies have had access to non-public information regarding the companies’ plans for 2010. These are internal planning tools, not forecasts. Orc’s plan for 2010 which was drawn up in November 2009 indicates revenues of SEK 676 million, an EBITDA margin of 29 percent and a closing annualized contract value (“ACV”) of SEK 618 million for 2010. The board of directors’ and management’s assessment of the outlook for 2010, as published in the quarterly report on January 21, 2010, remains unchanged; “In its overall assessment of the outlook for ACV, turnover and income in 2010, Orc has used the exchange rates in force at the end of 2009 and assumed that these will be unchanged during the year. Assuming that exchange rates will remain unchanged from the start of the year and that churn will drop to a more historically normal level, Orc expects ACV, turnover and income to increase in 2010 compared to 2009”. Neonet’s budget for 2010, which was drawn up in December 2009, indicates revenues of SEK 843 million and an EBITDA margin of 17 percent for 2010. This is divided between transaction revenues of SEK 759 million and other revenues, including license revenues, of SEK 84 million. The board of directors’ and management’s assessment of the outlook for 2010 is based on Neonet’s financial targets as presented in Neonet’s year-end report for 2009.
APPLICABLE LAW AND DISPUTES
The Offer shall be governed by and interpreted in accordance with Swedish law. The Offer is subject to the OMX Nordic Exchange Stockholm’s rules concerning public takeover bids on the stock market (“the Takeover Rules”) and the Swedish Securities Council’s statements regarding interpretation and application of the Takeover Rules (including its statement regarding the Swedish Industry and Commerce Stock Exchange Committee’s rules for public offers to acquire shares). Furthermore, in accordance with the Act Concerning Public Takeover Bids in the Stock Market, Orc has on January 24, 2010, committed to NASDAQ OMX Stockholm to comply with the above-mentioned rules and statements and to submit to any sanctions that NASDAQ OMX Stockholm may impose in the event of infringement of the Takeover Rules. On January 24, 2010, Orc has informed the Swedish Financial Supervisory Authority about the Offer and the above-mentioned undertaking to NASDAQ OMX Stockholm. The courts of Sweden shall have exclusive jurisdiction over any disputes arising out of or in connection with the Offer and the Stockholm District Court shall be the court of first instance.
ADVISORS
HDR Partners AB is financial advisor and Hannes Snellman Advokatbyrå AB is legal advisor to Orc in the transaction. ABG Sundal Collier AB is financial advisor and Grönberg Advokatbyrå AB is legal advisor to Neonet in the transaction.
INVITATION TO ANALYST AND INVESTOR MEETING
Date: January 25, 2010
Time: 09:30 a.m. CET
Place: Orc Software’s offices, Kungsgatan 36, Stockholm Telephone number: +46 (0) 8 506 477 00
INVITATION TO TELECONFERENCE
Date: January 25, 2010
Time: 3:00 p.m. CET
Telephone number: International participants call: +44 (0)20 7162 0077 Swedish participants call: +46 (0) 8 505 201 10 (PLEASE NOTE! Participants from London and Stockholm must also use the area code.)
The teleconference presentation can be downloaded from “http://www.orcsoftware.com/investor-relations/presentations/” Press Release January 25, 2010 9 (10)
