E.piphany Puts Octane in its Tank for $3.18B

In yet another deal that has analysts shaking their heads over the fundamental valuations of Internet companies, customer relationship management (CRM) firm E.piphany, Inc. (Nasdaq:EPNY), has agreed to pay $3.18 billion (US$) to buy privately-held Octane Software.

Octane had revenues of $3 million in 1999 and is on a rate to hit approximately $35 million this year, the firms said.

On Monday, business-to-business (B2B) supply chain company i2 paid $9.3 billion for Aspect Development, a B2B firm with $95 million in revenues and $8.9 million in earnings for its fiscal year ended December 31, 1999.

By contrast, the merger of the Times Mirror Company with the Tribune Company — which was also announced on Monday — has a combined market value of only $8 billion. However, the combined company will have annual revenues of about $7 billion and will own 11 daily newspapers, 22 television stations, four radio stations, the Chicago Cubs baseball team, and other assets.

In this latest merger, shareholders of Octane will own about 26.5 percent of the combined company after receiving 12.8 million shares of E.piphany stock. Both firms are based in San Mateo, California.

Scrapped IPO

Octane Software had just recently hired an investment banker to prepare for an initial public offering. It said that it scrapped the IPO in favor of the buyout because it can get its products distributed more quickly and broadly by combining with E.piphany.

In midday trading Wednesday, E.piphany’s shares were selling at $234 per share, down about $15 from its close on Tuesday at $248.93. Directors of both companies agreed to the deal, but the transaction still needs the approval of E.piphany shareholders and regulators.

E.piphany on the Rise

E.piphany has been a market sensation since it went public on September 22, 1999 at $16 per share and closed its first day of trading at $45. The firm has continued its meteoric rise to close as high as $317.48 last Friday. In the last three trading days, however, its value has dropped more than $80 per share.

This acquisition is the second for E.piphany since going public in September 1999. In November, E.piphany acquired RightPoint, Inc., for about $392 million in stock.

Nonetheless, despite both acquisitions, E.piphany still faces fierce competition in this segment of the e-commerce marketplace from such software giants as Oracle and Siebel Systems, as well as from such software startups as Kana Communications and Quintus Corp.

What is Driving This Valuation?

Sitting beneath this valuation is software that is designed to improve customer relationship management. E.piphany software allows a company to provide personalized interactions to its customers based on analyzing their purchasing behavior.

Its E.4 system is an integrated software suite that companies use to profile and analyze individual customer characteristics. That information can then be used to drive marketing campaigns and individually tailor products and services. The system integrates and manages information from front and back-office systems, third-party data, and other sources.

Octane brings multi-channel customer interaction applications and infrastructure software for sales, service, and support to the mix. Its Octane 2000 customer interaction suite allows customers to manage relationships between customers, partners, suppliers, and employees in a variety of interactions, including Web, e-mail, chat, phone, and fax.

Its iCare includes contact management, product and service requests, self-and assisted customer service, and personalization for customers, agents, and partners.

Together, the two firms serve more than 125 companies including American Express, Autoweb.com, Charles Schwab & Co., Compaq Computer Co., Critical Path, GTE, Hewlett-Packard Company, Internet Capital Group, Inc., Procter & Gamble, and WingspanBank.com.

Size of Market

According to Boston, Massachusetts-based AMR Research, the CRM industry in the U.S. reached $3.7 billion in revenue last year, a 60 percent increase from 1998. By 2003, AMR projects the CRM industry will be worth $16.8 billion.

International Data Corporation (IDC) predicts that worldwide CRM service revenues, including consulting, systems integration and outsourcing, will reach $90 billion by 2003.