In a complicated stock and cash transaction, Motient Corp. last week acquired Internet software company Rare Medium Group, a move that will bolster Motient’s wireless application and integration offerings and provide the struggling messaging carrier with some needed funds.
Investors applauded the move, sending Motient’s stock up about 50 cents to a little less than $2 per share, where it hovered for the rest of the week. Conversely, Rare Medium’s stock dropped by almost the same amount to hover at about $1 per share.
Industry observers see the move as a tough but necessary deal for Motient, which posted a first-quarter loss of $40.5 million on revenue of $23.4 million. The combined company, which will benefit from the $134 million in cash Rare Medium maintained through the end of the first quarter, is expected to have service revenues of more than $100 million and will almost double Motient’s employee base to about 1,000.
Under the deal, each Rare Medium share will be exchanged for one-tenth of a share of a new class of Motient preferred stock. Each share of the new stock will be convertible to 6.4 shares of Motient common stock. Motient will also pay 9 million of its XM Satellite Radio shares-a major playing card for Motient-and about $13 million in cash. In addition, Rare Medium’s previously announced $25 million loan to Motient will be absorbed by the new company. At the closing, which is expected in the third quarter, Motient will repay about $34 million in bank obligations, leaving the new company with a significant amount of cash.
“Today, Motient has a need for more cash,” said Walter Purnell, Motient’s president and chief executive officer. “They (Rare Medium) have a significant amount of cash on their balance sheet.”
The deal, company executives said, will help Motient reach its previously stated goal of breaking even in its earnings before interest, taxes, depreciation and amortization by the first half of next year.
“Our perceived liquidity issue will be dealt with decisively, and we will expect more positive financial disclosure with respect to our future liquidity as we complete this transaction,” Purnell said.
Beyond the cash issues of the deal, Rare Medium brings a strong history of software applications and service development, which company officials said will help Motient bolster its wireless application offerings and tap into the mobile enterprise market.
“One of the key growth inhibitors (in the mobile enterprise market) has been the lack of end-to-end solutions,” Purnell said. “E-mail opened the door, but now the customer wants to do substantially more-this is where Rare Medium comes in. With the consummation of this merger, we’ve created a company that is able to provide a full range of software solutions.”
And while Rare Medium has traditionally been more involved with the wired Internet rather than wireless, Rare Medium Chairman and Chief Executive Officer Glenn Meyers said the company was ready to take advantage of the opportunities wireless products and services create.
“We believe wireless data will be the new communications paradigm and platform of choice in this millennium,” he said. “We think mobile computing will be a big opportunity.”
Analysts seemed to agree with company executives’ assessment.
“As this would solve MTNT’s (Motient’s) near-term liquidity issues and would expand the scope of its product offerings, we view this as a positive for MTNT,” wrote Bear Stearns.
