Babbage's Inc. merging with Software Etc.

Software Etc. Stores and Babbage's Inc. have agreed to merge to become the nation's largest software retailer with nearly 700 stores and more than $500 million in revenue, the companies said yesterday.

After the merger, shareholders of Edina, Minn.-based Software Etc. would own about 54 percent of the stock in the new company and Babbage's shareholders about 46 percent.


Investors loved the deal, sending both stocks up sharply in heavy trading -- Software Etc. shares rose $1, to $10 a share, while Babbage's rose $1.25, to $13 a share.

"They look alike, the product they sell is similar, the corporate culture is similar," said Lewis Alton, a securities analyst at L. H. Alton & Co. "I can think of no reason for them to be incompatible on any basis."


But Michael Stanek, a securities analyst with Piper Jaffray, is less enthusiastic about the prospects for the companies, both of which are tied to a mall-based retail format. Like other areas of retailing, the growth in computer software retailing is among the big, stand-alone mass merchants, such as CompUSA, Circuit City, Best Buy and Computer City, he said.

Both companies have seen revenue increase in the last year but have seen profits slip as software prices continue to fall.

Software Etc. has been experimenting with locating larger format stores next to Barnes & Noble bookstores. Leonard Riggio, chairman of Software Etc. and one of the largest shareholders in Software Etc., is also chief executive of Barnes & Noble, the huge bookstore chain.

Mr. Stanek added that by combining organizations, the two companies will have greater clout with software manufacturers and should be able to negotiate lower prices and more attractive terms.

Since the chains in the near term will operate independently and retain their names, there are no plans for consolidations of stores, according to Software Etc. officials. Minneapolis-based Software Etc. has 352 stores in 47 states, while Dallas-based Babbage's has 320 stores in 40 states, Puerto Rico and Canada.

The companies will merge into a new -- and as yet to be named -- holding company, with each Babbage shareholders receiving 1.3 shares and Software Etc. shareholders getting one share of the new company's stock.