Legato Systems pulled out of a merger agreement with Ontrack Data International on Monday at the same time as it was hit with the latest in a string of class action lawsuits.
The storage management vendor announced last November that it would acquire data recovery software provider, Ontrack, for $134 million cash and stock.
Under the terms of the deal, which was expected to be closed later this month, Legato would have paid $20 million for Ontrack and issued 0.1491 shares for each Ontrack share.
Both companies said the termination was "mutual". An Ontrack spokesman claimed that the company abandoned the proposed merger "for the best interests of its shareholders, investors, employees and customers". Legato, which reported lower than expected quarterly earnings last week, declined to comment.
"We believe Legato's sudden actions may be the sign of more serious internal issues that have yet to be exposed," said Jordan Klein, an analyst at researcher Warburg Dillon Read.
The failed merger came at the same time as a class action lawsuit was filed against Legato and some of its officers and directors by the Boston law firm Shapiro Haber & Umy. The case was filed on behalf of all persons who bought Legato's common stock from 20 October 1999 to 19 January 2000.
When Legato announced its fourth quarter figures last week it admitted that it had improperly recorded revenues from three contracts during its third and fourth quarters for fiscal 1999. The company said it is restating its third quarter figures from $0.18 to $0.14 earnings per share and that its fourth fiscal quarter had fallen short of expectations.
For the fourth quarter Legato's sales grew by 47 per cent to $71.2 million compared with the same period in 1998, while net income, excluding merger-related costs, increased by 39 per cent to $9.9 million or $0.11 earnings per share. The First Call analysts' consensus estimate had predicted earnings of $0.20 per share.
The lawsuit also alleges that Legato overstated revenue during the period to meet or exceed financial analysts' estimates in the third and fourth quarters.
Legato chief executive Louis Cole said that "the company had to be judged by the real numbers, not what could of been or should have been".
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