Wednesday, October 31, 2007

Cabbage Night

The morning before Halloween -- usually a good day to see toilet paper hanging from trees, since it's the morning after what we used to call "cabbage night."

I took a bit of a walk this morning, and saw only a couple examples of such youthful enterprise. As my brother and walking partner explained, the great thing about TP is that it dissolves with a couple of rains or even a couple of frosts. The vandals get to feel they've gotten away with something, and the homeowners don't have to work very hard at a clean-up.

All of this is by analogy pertinent to the matter I've been discussing all week, the rebuff by BEA Systems of Oracle's effort to buy their equity, and Icahn's unhappiness at that.

For when a large shareholder is unhappy, one of the more amusing ways in which he can vent that unhappiness is with a letter to the board of directors, and the required 13d filing of that letter with the SEC. The point of these letters isn't that the directors should read it -- but that the SEC will post it on its website and the rest of the world can read it. It's like the TP on that tree in your lawn: it isn't there for your benefit so much as for that of passers-by. And although it may signal coming struggles, the 13D is in itself harmless enough, disappearing after a couple of good rains.

Icahn's recent letter to the board of BEA, as you can discover for yourself from the SEC site (or just read it here -- I'll mine that site so you don't have to) takes a stern tone:

"You should have no doubt that I intend to hold each of you personally
responsible to act on behalf of BEA's shareholders in full compliance with the
high standards that your fiduciary duties require, especially in light of your
past record. Responsibility means that SHAREHOLDERS SHOULD HAVE THE CHOICE
whether or not to sell BEA. BEA belongs to its shareholders not to you."

Caps in original.

I have to say: there are other activist investors who write this sort of letter with a good deal more panache. Robert Chapman has written some classics. He once wrote to the directors of one of the companies in his portfolio: "In essence, you should live and breathe under the cloud that your past failures have subjugated you into a state of perpetual audit."

That's the spirit!

Tuesday, October 30, 2007


That's one of the great buzz-words of business. Synergies. Every merger is justified by the "synergies" it will create.

Way back in the 1970s, the golden age of conglomerate creation, no one bothered with this claim. There was a prevailing idea that a large corporation should be a balanced portfolio all by itself, so that the simple unrelatedness of the businesses brought under a single corporate roof was enough justification for the deals.

But then, that was the era of the Warren Court, and the early years of the Burger Court. Antitrust law seemed to make almost any combination between two businesses that weren't utterly unrelated the object of suspicion.

The judicial and political climate is quite different now. Companies claim synergy for their mergers both because "conglomerates" got a bad reputation back in the old days and because they now feel confident that they can claim synergy without bringing down on their heads adverse consequences.

This all brings us back to BEA Systems and Oracle. They're both software companies. They are even direct competitors in some parts of the vast category of product. Still, in a software world dominated by Microsoft, one can make a case that smaller players need to combine -- that this is pro-competitive -- because the process may creates an effective competitor, a counter-balance to that Big Kahuna.

Oracle's CEO Larry Ellison almost said this (not in terms of public policy, of course, but in terms of his own vision of the market's future} in a conference call in late August.

"Microsoft, with their middleware, a lot of which is embedded in Windows, Microsoft being the number 1 player, IBM being the number 2 player, and Oracle being the number 3 player in middleware. We passed all the other niche players. We really separated ourselves from the niche players. BEA, we’re almost twice as large as BEA right now, BEA is shrinking in terms of new license sales. So, it’s come down to the same big three, but we’re growing dramatically faster than our competitors and our target really is to beat IBM because it’s very difficult to measure the size of Microsoft’s middleware business because so much of it is embedded in Windows."

He stoops to conquer. You'll notice that he was recently belittling that "shrinking" company he more recently has sought to buy. Not shrinking so fast as to have nothing to offer, I guess.

Contemplate the activities of belittlement on the one hand and attempted ingestion on the other. Do those activities display any (what's the word I want here?): synergy?

Monday, October 29, 2007

The Usual Arguments

There are some standard arguments that an incumbent management of a target company typically makes when a potential acquirer offers an above-market price for a controlling share of a its stock.

So, yes, the offer is for $17 a share and the stock was selling for $14 a share before the offer was made but stockholders should support our refusal to do the deal because:

1) we are working on a strategic plan that will in time have the price at or above $21., the disruption of a change in ownership will only block that plan
2) the offer isn't reliably financed, so the offering price is illusory
3) the buyers don't know how to run a company of this sort, so they'll destroy its value soon after they take over
4) the control premium they offer is too low, we can get better from another buyer.

Note that although arguments (1) - (3) can be employed to defend the continued independence of a company, argument (4) effectively concedes the need for consolidation.

In the case of BEA Systems, their rather terse public statements have suggested (1). The issue of financing hasn't arisen.

Clearly, in this case, classic argument (3) won't fly. The bidder is Oracle, after all. They are running a business of just the same sort as BEA.

Finally, (4) might avail against Oracle, but doesn't work as against Icahn's dissatisfaction. Icahn is calling, precisely, for BEA to hold an auction -- if it can get better than the $21 Oracle is offering, he'd presumably be happy to see it do so.

Sunday, October 28, 2007

Carl Icahn Helps Us Get Started

Carl Icahn wants BEA Systems to auction itself off.

BEA, a company founded in 1995 and headquartered in San Jose, Calif., sells software: largely to financial-services companies, although its products have other outlets as well.

Oracle wants to buy it. Not the software, the company. But BEA's management has allowed the deadline to lapse on Oracle's bid, ticking off Icahn, who doesn't think the stock is worth as much under current management as Oracle is offering. This is a classic set-up for a proxy fight, and Icahn is a grizzled veteran of the game.

This is also a good excuse for us to work through some terminology. Though sometimes used loosely, the words "takeover" and "merger" have in their strict use quite distinct meanings. A merger is the mutual decision by two companies to combine -- it involves a vote by both sets of shareholders. A takeover, on the other hand, is the buy-up of the shares of one company in the market by another.

A takeover can be either friendly or hostile. In the case of a hostile takeover, there are various defenses an incumbent board might put in place to limit a buyers' ability to attain a controlling share of the compnay equity -- we'll likely have a chance to discuss them if I continue writing this blog for any length of time.

But of course the chief reason for an acquirer to try to work within the corporate structure of its target and accomplish a merger is that going the takeover route can be tricky and costly if the target resists effectively.

What Oracle proposed was a merger. It's offering $17 a share, but the management of BEA has taken the position that this isn't enough. It wants a minimum of $21.

That seems quite a brassy demand, since BEA's stock was trading at about $14 in early October. It rose above $18 briefly after Oracle made this offer. In effect, investors bid it up to that level in the expectation that the $17 offer was just an opener, and that Oracle would sweeten it a bit. But as management's hostility to a deal became clear, the price sank below the $17 offering level, and closed Friday at $16.50.

Why do the BEA honchos think their firm is worth $21 a share? or are they just pretending to think so? We'll get to this tomorrow. Feel free to post your comments and tell me I'm an idiot if I'm getting any of this wrong. It's the only way I'll learn.

Saturday, October 27, 2007

Proxy Fights Are Fun! Let's Watch

The receipt of proxy materials in the mail is seldom an exciting event. Usually, a corporation tells you that they want to change some blah blah in their charter to bluh blah. You don't see how it makes any difference to you, so you throw it away. If that's the highpoint of your day, you need to get out more.

But if you're lucky, you might some day own shares in a stock that becomes the subject of a proxy fight, in which competing slates of would-be directors, or advocates and oponents of a particular resolution, are competing for your vote. Then you have a decision to make. A decision that may impact your household bottom line. If you are in such a context, then the receipt of materials might in fact be the highpoint of your day. Although it still might be a better idea to get out more.

Anyway: why shouldn't such fights become an event of aesthetic appreciation and enjoyment? A spectator sport, if you will? There's no reason they can't. So I've created this blog, and I'll try to comment on ongoing proxy disputes in corporate America in the manner of a ringside commentator. More like Howard Cosell than Dennis Miller, I hope.

We'll see.