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Investors in deal to buy Digital River

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Updated at 6:18 p.m.

An investment group has struck a deal to acquire Twin Cities-based Digital River, paying about a 50 percent premium for the pioneering e-commerce services provider.

Investors led by New York-based Siris Capital Group are offering about $840 million for Digital River. The e-commerce firm helps software, computer gaming and other companies distribute their products via the Internet. 

Digital River was once seen as a potential powerhouse but has been struggling lately. Sales have been flat, and the company has lost money every quarter for two years. 

In a prepared statement, Digital River CEO David Dobson said the agreement "represents a clear endorsement of our transformation strategy." But the company would not provide additional comment beyond what was in its press release.

Digital River was founded in 1994, when software typically came in boxes and was sold only in stores.

Investors considered the company an exciting e-commerce player with a lot of promise, said Michael Gorman, a managing director of the Split Rock Partners investment firm.

"Joel Ronning, the founder of the company came to market with a bold and audacious idea, which was to use the Internet as a means for delivering software and services," Gorman said. "It was an exciting time for a company in Minnesota to be taking on that role."

Digital River signed up some big companies as customers.

"They had folks like Microsoft and Symantec who were leading technology companies who believe working with Digital River was superior to taking on this function on their own," Gorman said.

The company distributed tens of billions of dollars in software a year. 

But over time, some companies decided they'd rather handle e-commerce in-house. 

In late 2009, Digital River's largest customer, Symantec, announced it would take care of e-commerce itself. The anti-virus software company was a hugely important customer and alone accounted for about a quarter of Digital River's sales at the time.

More competitors also got into the e-commerce services business, too, because it wasn't that hard. As one analyst warned, there was "no moat" around Digital River's business.

At $26 per share in cash, the buyers are paying almost a 50 percent premium over Digital River's Thursday closing price.

But the agreement includes a 45-day "go-shop" period during which the company can seek other, more lucrative proposals. 

The company said there is no guarantee it will find a better offer. 

Go-shop provisions are very rare in public company merger and acquisition deals. Most merger deals prohibit efforts to find other buyers, said Brett Anderson, an attorney with Briggs and Morgan.

Anderson said the provision can indicate the company was not looking for a buyer, and Digital River's board members may think they can find a better deal.

"They're obligated to seek the best value reasonably available to their shareholders," he said. "So, if a seller hasn't been shopping for a deal, for instance, prior to entering into a definitive merger agreement, the agreement may permit the seller to go shop."

If no new buyer emerges, Digital River would become wholly owned by an affiliate of Siris.

The agreement was approved by Digital River's board of directors, which includes former Minnesota Gov. Tim Pawlenty. The transaction is expected to close in the first quarter of next year.