Regretting $24 million

eMation ambled on for years, then almost got killed by New Economy visions

Nathan Lipson
Nathan Lipson

For over a decade since its establishment in 1988, Israeli software house PC Soft managed to live off its earnings and a small initial investment of a few million dollars. Then an investment of $24 million brought it to its knees.

PC Soft developed software to monitor production processes. Its products sold well.

In early 2000, it decided on a change in focus. It wanted to develop programs to monitor and control production via the Internet.

Its adopted sector is known as DRM - Device Relationship Management. The similarity to CRM - Customer Relationship Management - is no coincidence. CRM was a proven cash cow.

The leading CRM company is Siebel Systems (Nasdaq:SEBL), an American firm with a market cap of $21 billion. For 2000 it posted earnings of $300 million.

As it revamped its business model, PC Soft also changed its name, to a company you've probably read about lately: eMation.

New Economy, new values
eMation kicked off its new life by raising $24 million, half from the U.S. fund Patricof and another $7 million from Patricof affiliate Apax.

A year later, the money was gone. Oren Zeev of Apax explains how it happened.

"Like in many cases of such financing, some of the money was used up even before it arrived due to bridge loans and commitments," Zeev began.

"Shortly after the financing round, eMation carried out an acquisition financed in part - $4 million - in cash. That left $15 million.

"The rest just went down the tubes. The company picked up speed in 2000 because we felt it was a great opportunity. We couldn't anticipate how deep the financing crisis would become. We burnt up a million and a half a month, or more," Zeev admits.

By year-end 2000 eMation had grasped that the market had changed and it would have to too.

At its peak, eMation employed 150 people. Today it's down to 90.

Ravisent to the rescue
But even so, it ran out of money. After examining its options, it finally elected to merge with a shell company called Ravisent (Nasdaq:RVST). The company was devoid of activity, after selling it off in March this year, but it had $70 million in kitty and equity of $86 million.

The deal is still contingent on shareholder approval, but in principle, Ravisent will be issuing 8 million new shares to eMation's shareholders, comprising 30% of the merged company's equity.

eMation workers will be getting another 1.5 million shares comprising 5.5% of the merged company's equity.

The driving force behind the deal was Patricof. The fund had invested in both eMation and Ravisent, and it has a representative on Ravisent's board. Apax also had a director, but he quit weeks before the transaction went through.

Ravisent will be reinventing itself based on eMation's business, Zeev explains. The merged entity will even call itself eMation.

Although eMation brings no assets, only debt, to the marriage - it is bringing revenues, which came to $10 million in 2000, Zeev says. Most of that derived from its traditional business of software for production processes.

Sales have been growing by 25% to 30% a year, he adds, and DRM sales should commence this year. Zeev for one is confident that DRM can be as big as CRM proved to be. Were ratchet mechanisms implemented to prevent dilution of investors, at the expense of founders, given the low sales price?

Zeev: Yes. A liquidation preference mechanism was implemented. Ordinary shareholders, the entrepreneurs and others, were diluted by preferred shareholders and others.

Patricof's stake in eMation before the deal stood at 17.7% at full dilution. After the deal, but pre-merger, it grew to 30%. Apax's stake grew from 16.6% to 25%.

eMation isn't making a dime and it has no cash. Didn't Ravisent pay too much?

Ravisent's board approved it unanimously in the absence of Patricof's director.

Naturally the board doesn't represent all the shareholders, but it was convinced. The alternative was to disband the company and get something like $4 per share.

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