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.

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