I got a proxy in the mail today because I own a bit of stock in NetIQ. It's only a handful of shares, tucked away in an IRA, that I purchased since I'd once worked for them.
Anyway, I mention this not to focus on my personal investment strategies, but because it brings some of what I'd learned in Corporations class home in a personal way. Basically, this proxy is calling for a vote by the shareholders on whether there should be a merger. Reading more closely, however, I see that it's not a convention big-fish-swallowing-little-fish merger, which would leave us holding stock in the big corporation, but rather a merger with a holding company that would buy all the outstanding shares for cash. Which, it would seem, would convert NetIQ from a public company to a private one.
I have no experience with this kind of thing. (Who am I kidding - until I took the class, I never even opened my proxy statements since I'd have no idea what was going on or why I should care.) So one question I have is whether a "merger" with a holding company is a typical way of taking a company private. If so, then I can evaluate whether I think that's a) a good idea, and b) done at a fair value for me. But if it's not, the whole scenario is troubling. Especially because the terms of this deal include preventing the board from seeking a better offer (though they can entertain one if one falls in their lap), and because the "premium" offered is not that much above where the stock is today.
Even if there is nothing unseemly, however, I'm not sure I'd want to go along with this plan. While I think there can be certain efficiencies involved in running a company when it doesn't have to worry about shareholders' interests, as a current shareholder who would no longer continue to be following this deal, that's probably of little interest to me (except to the extent that it could allow for it to be a larger or more stable employer for my friends and colleagues from the area, which is not an insignificant concern).
Plus, I'm not sure it looks out for my personal economic interests. The fact of the matter is that I've probably lost some money on the stock, having bought it during the waning days of the boom. But that's ok, it's just sitting in a retirement account. The company always seemed solvent enough to wait out an eventual rise back up. Plus because it's in an IRA it means my investment horizon is long enough to not be in any rush to cash out, nor is there any advantage for me to take a tax loss. But if this deal goes through, it will result in me cashing out. Game over, with no further chance to recover my investment. It therefore forces my investment to change from a long-term one to a short-term one, yet I don't think that's in my financial interest.
So I don't know - I suppose the company could be doing this because it is in some trouble, so maybe it is better to get out now. But that's not really what I want. What I want is for the company to make good products and good decisions, and for me to go along for the ride.
Comments (6)
More background on what's going on here: Read history of the acquiring company and merger details at end of this article: http://en.wikipedia.org/wiki/AttachmateWRQ
Posted by Annonymous | June 3, 2006 12:26 PM
Posted on June 3, 2006 12:26
Why doesn't that page make any mention of the "Wizard Holding Company," which is listed on the proxy statement as being the NetIQ buyer and parent company of "AttachmateWRQ"?
Given NetIQ's enterprise software business the mix of that with OnDemand would seem to make sense for AttachmateWRQ, but my question still remains - what's in this for me??
Posted by Cathy | June 3, 2006 12:42 PM
Posted on June 3, 2006 12:42
Probably the holding company isn't mentioned because such internal corporate arrangements are rarely interesting to anyone except a corporation's lawyers and accounts. I wouldn't expect to see that kind of detail in a Wikipedia article.
What's in it for you, incidentally, is about a point and a half (roughly thirteen percent) premium over where the stock was trading pre-merger announcement. Oh-- and the fact that the company won't go belly-up on account of its constant running of an operating loss and its survival via sale of assets, issuance of stock options in lieu of compensation, and outsourcing of development functions to Bangalore.
Posted by Annonymous | June 3, 2006 1:35 PM
Posted on June 3, 2006 13:35
Well, re: sales of assets, it really needed to divest itself of Webtrends. Probably never should have bought it in the first place, either. It never fit into the product line, which was more about server-side monitoring. Webtrends was much more client software and NetIQ really didn't know how to sell to that kind of market.
Still, it's alarming to see the company just give up like it is. I think that's what I find so troubling. So, yeah, maybe I should bail out while I can... But I have a sense that this whole isn't going to be up to me anyway.
On the upside for the people still working there, it will accelerate their options, which may be a good deal for some. On the other hand, the board cannot shop the company (did it ever even try???) and is paying for a lot of this out of its own cash reserves, if I read the proxy correctly. If so, it seems like there might be better ways to use that cash to increase the company's long term value.
Posted by Cathy | June 3, 2006 1:57 PM
Posted on June 3, 2006 13:57
Yup... You hit the nail on the head. It really isn't up to you (or folks like you), since in a company like this majority ownership is nearly always pretty well concentrated.
Option acceleration is definitely a part of this equation. Of course, its also a double edge sword. A whole lot of options will have strike prices that are way too high and will therefore be wiped out. On the other hand, recently issued options, which probably have more realistic strike prices, will be accelerated-- which is a nice deal for those who have them.
More importantly, from the point of view of insiders, is that the deal will buy out their vested (fully owned) shares at market price, without risk of further erosion of value. This is important because it is often very difficult for insiders to liquidate (or even significantly reduce) their ownership interests while a business is a going concern, since doing so sends a message that they have no confidence in the business.
Wouldn't worry about the no-shopping clause. The proxy vote is the last step in a long process. Any shopping would have happened way earlier. This thing was likely a done-deal from the point it was announced.
As for the cash reserves, the language you are seeing is probably just reflecting the fact that the company's cash is getting thrown into the deal along with all of its other assets. You'd expect that. Remember, the cash was a componant of the underlying value of the company that led to its share price.
I think the main point here is that there are only so many games a business with a continuing operating loss can play in order to stay alive. And here, management decided that those games had played out.
Posted by Annonymous | June 3, 2006 8:05 PM
Posted on June 3, 2006 20:05
The premium isn't that much above the current stock price because the current stock price rose to reflect the merger offer. If X has a plausible promise to buy Y stock for $10 a share, no one is going to want to sell the Y stock for $7 a share.
Posted by Ted | June 18, 2006 8:35 AM
Posted on June 18, 2006 08:35