Monday, September 17, 2007

Activist investor targets BEA

It is all over the news this morning, private investor firm Icahn & Co filed a SEC report disclosing a 8.5% stake in BEA, with an activist investor agenda to follow.

From MarketWatch:

Icahn, known for forcefully pushing an agenda at companies where he acquires ownership, disclosed his stake in a filing with the Securities and Exchange Commission. In the filing, he suggested that BEA Systems should put itself up for sale.

"A sale of the Issuer [BEA Systems] to a strategic acquirer will maximize the price of the shares," Icahn said in the filing, adding that he intends "to seek to meet with management of the Issuer to discuss the potential for such a transaction, as well as the Issuer's business and operations generally."

Shares of BEA Systems rose 57 cents to $13.32 before the market's close.

Icahn also notes in the filing that San Jose, Calif.-based BEA Systems has not held an annual shareholder meeting in over a year. Icahn "may seek to have such a meeting held and may also seek to nominate individuals for election as directors of the Issuer," according to the filing.

Icahn tends to seek out companies with promising assets that have nonetheless encountered difficulties. He is best known for taking high-profile stakes in companies such as Imclone Systems, and more recently mobile phone company Motorola Inc., where he unsuccessfully sought a seat on the company's board of directors earlier this year after acquiring a large number of shares.

Investor activists identify targets who they believe hold a lot of potential value, that has not been realized. Reasons may include lack of governance by ineffective board, mediocre and complacent management team, wrong or poorly executed strategy, whatever. They acquire a significant stake in the company and try to bring about the change they believe is needed.

BEA's shares are up 5% on the news. Which, for Icahn & Co, amounts to a cool $20m, not bad for a month's work. That's a real business model, one with high margins. I bet most of their operations are PR, IR, research.

What do they have on BEA then? Well frankly, nothing new... which is also probably the strength of their case. They reason that because of consolidation, and pressure from competition, their business model is profoundly fucked at a sales and marketing level. Hey, don't look at me or my friends at JBoss. We have been saying this since, oh, 2001. Icahn & Co. believe BEA's assets would be better exploited by a "strategic" acquirer.

I kind of agree. Selling BEA is probably the right thing to do. As a standalone entity, carrying all the operational cost of marketing and selling proprietary software becomes increasingly cumbersome. That fact alone fuels the consolidation fire. It also points to one of the main advantages for the OSS business model: lower cost of customer acquisition.

From a buyer's perspective, consolidating subscription revenue streams is a tried and true business model of growth, think IBM, Oracle and CA. Even dying businesses have a half life in their maintenance phase that is measurable. Think Novell, zero in new licenses, 500 mil in maintenance, or think CORBA--people will be using that stuff for another ten years at least. Estimate the present value of the future streams until they decrease to zero, and you have what the business install base is worth to you. Any discount (or future growth) from that is free money.

But selling BEAS is going to be hard. Founders can be notoriously difficult to dislodge :) In this case, they've got that crazy car-racing Chinese dude who won't let go. This is the guy who told an acquaintance that he believed I was going to physically harm him, this coming from the guy who brags about being such an ANIMAL that he has to be driven around by a lackey so he won't harm himself...That is probably why Icahn are talking about proposing their own directors for the board.

What doesn't gel for me, in reading the coverage, is Icahn accusing BEA's management of actively avoiding a sale. Is that truly the case? Is there an outstanding offer from Larry that Alfred is doggedly refusing? Maybe Icahn's team knows something we don't. It's possible, but I doubt it. Or, maybe Icahn figured they weren't going out on a limb since BEAS has been rumored to be on the block many-many-many times over the past few years and nothing has happened.

The recent price bump is not going to help. Last I heard Oracle believed they could take away most of BEA's installed base by investing a fraction of the $5b it would take to buy it. Sure it is a cocky approach and one that will take time and could backfire badly. Remember, however, Larry is the lunatic who went after Linux all by himself, BEA he will do before lunch. He'll fuck up a deal just for the fun of it.

At the end of the day, with the press coverage, Icahn & Co. got a 5% gain on their money already. True, an acquisition premium can go as high as 30%. But a 5% jump is already a 5% jump. I don't know what I don't know, but from the outside, it looks like they could run it up 15% on PR alone. At that point, since a white knight buyer who's going to swallow a 30% premium on BEAS' existing market cap is unlikely, they should count their winnings and walk away from the table.

Then again, I am not in the business of investor activism.


Army No. Va. said...

OK, where is Michael Milken of the 1980s junk bond fame to finance the takeover? :-)

Icahn and BEA...nice!

douglas dooley said...


I have been preaching an Oracle acquisition of BEA since 2000, when Sun was coming out with an app server program that, now, finally appears to take the sails out of those Sun GSO reps. that continue to hawk WebLogic...

I think the AquaLogic stuff would actually look good under ORCL, but its going to take a lot of damaged egos to sell-out, as they have had their eyes on being the Java OS for so long, and believed they could be the acquirer for that long...

would love to hear your updated take on Glassfish when you get the time and interest to post about it,


douglas dooley