How did it all begin? In the near future, Mercury Interactive Corp. (Pink Sheets:MERQE) and Hewlett Packard (NYSE: HPQ) will publish the document in which will they detail the long, tortuous negotiations that finally led to the mega-acquisition of Mercury by HP for $4.5 billion, in the largest ever deal, in Israel’s technology sector, and in fact, Israeli business altogether. Until then, “Globes” will outline the path that led to the signing of the contract. “Globes” was the first to reveal the negotiations back in May, naming Hewlett Packard as the buyer.
It became clear a year ago that Mercury had actively entered the radar of some of the computer giants which began to consider acquiring it. This was before the options scandal, a development that sealed Mercury’s fate as a company that should perhaps be sold. At that time, the software market was warming up, and Mercury’s specific segment was characterized by handsome growth rates even when times were tough.
Moreover, Microsoft had begun to move toward offering QA software solutions, a development which brought a long list of software giants such as SAP, IBM (NYSE: IBM) and Computer Associates Inc. (NYSE: CA) to the realization that they would need to make an acquisition to strengthen their activity in the field, or alternatively, enter fields that would constitute a virgin market for them. IBM has already acquired one of Mercury’s competitors, Rational Software, and the other companies still didn’t come up with an answer.
But Amnon Landan, Mercury’s legendary chairman and CEO and the strongman in the company, was not in a hurry to sell. He repeatedly said that if Mercury decided to go it alone, within a few years it would be in the top flight alongside the global software giants. All the IT giants had their sights set firmly on its good technology, impressive customer base, and handsome growth rates. Landan, however, stuck to his dream - to become a top flight international software company.
The event that turned everything upside down was the recent options backdating affair which resulted in the resignation of Landan and two other strong managers and later forced the company to make a profit write-down of more than $500 million. With the scandal over the options now out in the open, Mercury’s board promoted Anthony Zingale to president and CEO and appointed Giora Ron as chairman. The two were assigned one task only: to sell the company. According to a source close to the negotiations, HP did not approach Mercury. Rather it was Mercury with its new management that went out looking for a buyer. IBM, CA, and HP were the first ones to express an interest; they were later followed by Oracle Corp (Nasdaq: ORCL) and Siebel Systems.
Who picked up the bargain
Having now embarked on the search for a buyer, Mercury hired US investment bank Goldman Sachs (NYSE: GS) to manage negotiations on its behalf and find someone with means who would be willing to take on the deal. Every big US software company that was involved in the negotiations has a different investment bank acting for it, and the one that cashed in was Merrill Lynch (NYSE: ML) which represented HP. Sources close to the deal say, however, that Zingale was the one at the front throughout the negotiations, in a format similar to other deals where the chairman ensures that everything is above-board while the CEO does the talking.
The accountants advising on the deal were PricewaterhouseCoopers, with Kesselman & Kesselman involved only with regard to the company’s R&D center in Israel. The same applied to the lawyers. Apparently, the Israeli team Zysman, Aharoni, Gayer and Co. were not involved in the negotiations, with San Francisco law firm Morrison Foerster handling them instead.
The risk transfers to HP
Anyone who read “Globes” in May will have already known then that HP was on the verge of acquiring Mercury. The two companies reached agreement that Mercury would be acquired by HP. The negotiations reportedly became exclusive. By the time the final protracted stage of negotiations had been reached no other companies were left in the frame. Mercury did not expect to receive two envelopes yesterday, just the one from HP. After the acquisition was reported in “Globes”, Mercury decided to move all the discussions on due diligence and other related matters to HP’s headquarters in Palo Alto, California, and Mercury’s US headquarters in Mountain View, leaving Israel out of the picture, for fear that the source of the leak was based in Israel. The two sides subsequently agreed on the wedding.
The due diligence review then reached the crucial legal stage. What would happen to the class action suits against Mercury and its managers after the acquisition? What about cases in which they would have to compensate shareholders in one form or another? “The risk ultimately transferred to HP,” said source involved in the deal. “They decided to do it because they felt sufficiently secure despite the considerable exposure. They have obtained supporting legal opinions, which have affected the value. It would have been lot higher otherwise.” By how much? “Not a lot,” he replied.
The security issue was raised
HP is not afraid of making acquisitions in Israel. It proved this in the past when it acquired Indigo and Scitex Vision. What’s more, Mercury is, in fact, a US company. However, a source involved in the negotiations said that security was nevertheless an issue and was raised during talks held in recent days, once Mercury had completed the restatement of its accounts and put the options affair, at least from the practical standpoint, behind it. Market sources say that the deal has sent a political message, whether HP likes it or not. Now that it is invested in Israel up to its neck, HP has decided that the technological world is still more important than the political one.
Published by Globes [online], Israel business news - www.globes.co.il - on July 26, 2006
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