The transaction is being structured as spin off of 100% of Teradata to NCR shareholders tax free.
Details of stock distribution have yet to be hammered out as the deal still waits approval from NCR’s board; approval by NCR shareholders is not required.
Analysts estimate that the combined value of the stocks of the two companies would be $46 to $47 a share.
NCR anticipates a six to nine month separation process and has engaged JP Morgan to help manage the transaction. NCR expects a tax ruling from the US Inland Revenue Service authority later this year.
Founded in 1884 as National Cash Register, NCR developed the first mechanical cash registers and bar-code scanners. The company now develops a range of self-service technologies including automated teller machines, self check-out systems for retailers, automated bill payment kiosks, self check-in systems for airlines, hotels, and hospitals, point of sale systems, customer support services, printer consumables and check imaging solutions. These combined business lines generated $4.5bn in revenue (2% growth) and operating income of $251m in 2005.
In February 1992 NCR (then part of AT&T) diversified into the data warehousing software market following its acquisition of Teradata Corp.
Teradata now provides the software and services behind many of the world’s largest analytic data warehouses used by companies to gain a single, integrated view of their business to enhance decision making. It has now grown to become of NCR’s consistently strongest performing business unit. In 2005 Teradata’s revenue grew 9% to $1.5bn with $309m in operating income.
The leadership structure of each company is expected to be unaffected. Bill Nuti will continue in his current role as president and CEO at the NCR division. Meanwhile Mike Koehler will be promoted from senior vice president to CEO of Teradata.
Koehler joined NCR in 1975 and has held a number of key positions, leading NCR’s global field operations and America’s retail division. He has also been instrumental in driving data warehousing into the retail sector.
Since Koehler assumed his position at Teradata he has helped the division grow from $1.2bn in 2003 to $1.5bn in 2005.
NCR employs around 29,300 people worldwide. The composition and structure of the two companies’ management teams and boards of directors are still being worked out.
We’re not commenting on any other management changes today, said Nuti in a conference call yesterday morning. He did however confirm that Pete Bocian will remain as CFO of NCR.
Nuti said in the call that the decision to split the company into two independent businesses was a logical step for NCR and would allow each business to better focus on its own strategy, operational needs and customer base.
Teradata and the new NCR each focus on separate businesses — NCR focuses of self-service technologies and related solutions while Teradata provider enterprise data warehousing and consulting services — and have markedly different business models.
Each new entity should [now] be able to more effectively pursue their specific growth and R&D agendas with greater management focus.
Plus investments can be made in each independent company without having to balance investment needs of the other.
Despite NCR and Teradata both being strong in retail, there is a minimal overlap in terms of joint customers, offering minimal cross- or up selling opportunities for its enterprise data warehousing software and retail hardware technologies.
Even though we both leverage strong heritages in the retail sector we’re selling to completely different people in these companies, explained Bob Fair, Teradata’s chief marketing officer.
Nuti himself admitted there was very little revenue synergy between the two companies thus far.
There are no revenue synergies to be concerned about. But we’ll continue to partner tightly and leverage joint field activities and a few large customers.
He added: We’ve been running Teradata as a standalone business with shared infrastructure costs within the NCR company. We believe the segregation of that infrastructure over time will not create excessive incremental costs for both of these companies to run standalone.
But Nuti is of the opinion that creating two separating companies strengthens the business prospects for both.
He believes the new NCR is strongly positioned to exploit new opportunities in emerging self-service technology markets through enhanced operational excellence, increased investment in its sales organizations, lowered manufacturing costs and supply-chain efficiencies.
Nuti said: Self-service is a large and growing market. Retailers, airlines, hotels and airlines have learnt that elf service channel improves customer experience and lowers transactional cost.
Over next several years Self service develops into a must have channel for business to consumer, NCR leader enabling self service technologies to facilitate consumers on the go, Internet and mobility initiated transactions and continue to add value in area of automating high cost transactions.
Nuti expects NCR to increase its investment in its sales organization to better target new verticals like healthcare, public sector, travel and transportation and gaming.
These markets that now have similar uptick for self service technologies than mature areas like retail banking. So we’ll be creating more demand creation headcount to grow our revenue footprint and share in these new industries.
We’ll also be looking to complement mature segments, like financial services, with adjacent self service solutions such as next generation self service platform technologies or teller assisted cash dispensing and recycling alongside traditional A services.
Nuti also hinted at what he called smaller targeted acquisitions to help NCR penetrate new verticals.
From a Teradata perspective, Nuti said the company is equally well positioned to benefit from the $18bn enterprise warehouse market as it shifts to centralized architectures and as companies grapple with increasing data volumes, real-time analytics and new location-based data elements like radio frequency identification (RFID).
Nuti also said that NCR investors would benefit from what he called increased transparency and clarity of each company’s business and operating results putting them in a better position to judge the merits, performance and future prospects of both companies.
Both companies will now have direct access to capital markets to fund their growth agendas.
That, perhaps, is the key factor behind the split which investors have urged NCR to do for some time. It is clear that the Teradata business is more dynamic than NCR’s historic, but more recently sluggish, A and retail cash register hardware businesses.
A split could boost the stock value of Teradata that has been weighed down by lower margins on NCR’s core banking and retail checkout business. As a result the true net worth of Teradata’s stock has remained clouded by NCR’s lower profitability.
NCR’s core hardware business has an operating margin, excluding pension costs, of about 5 to 6%. That compares to 20 to 21% for its Teradata software unit.
This is an important step in NCR evolution and renewed emphasis on top line revenue growth and earnings expansion. It will enable Teradata to become a faster growth company, Nuti said.
NCR chairman Jim Ringler admitted that the NCR board had deliberated on whether to spin off Teradata for a number of years, but had come to the conclusion that it was not in the best interest of shareholders at that time.
In the past we did not feel Teradata was sound enough really. A few years ago it wasn’t making money. But it has now started to make money and has a more solid base.
Nuti however discounted the view that the spin-off was a precursor to setting up Teradata for a future sale.
We’re not doing this separation to affect a potential acquisition of Teradata. That’s not the goal. We think Teradata as a standalone company in data warehousing has a very bright future as a public company.
Of course NCR’s decision to pull apart Teradata might also be a response to increased competitive pressure in the market, particularly from new data warehouse appliance vendors like Netezza Corp and Datallegro Inc who are starting to nibble away at its market, as well as entrants in the enterprise data warehousing market like Hewlett-Packard Co.
Late last year HP introduced its NeoView system, based on Tandem’s NonStop database and Integrity Servers, that is targeted at high-end data warehousing.
Interestingly Mark Hurd, HP’s CEO is a former CEO of NCR and also managed the Teradata division. HP recently confirmed that Hurd has met with several Teradata customers to show them NeoView. But it added that Teradata accounts are not specifically being targeted.
News of the Teradata spin off sent NCR shares up as much as 7% in heavy early trading on the New York Stock Exchange yesterday.
NCR will report its fourth quarter and full fiscal 2006 year results on January 25.
