Mercury Extracted High Price From HP, Despite Options Scandal

Includes: HPQ, MERQ
by: Shlomi Cohen

Hewlett-Packard is making another large acquisition in Israel, after buying printing technology company Indigo five years ago in a $800 million share swap deal. Tuesday night, HP announced that it was buying Mercury Interactive Corp. (MERQ) for $52 per share cash, or $.45 billion in total. The price is substantially higher than the share price of $35 at which Mercury stood on November 1 2005, just before then chairman and CEO Amnon Landan and two other senior managers were fired.

Following the dismissal of the previous management, the company's share price fell to a low of $22. In June 2004, the price rose above $50, and at the height of the stock market bubble, in March 200, it reached its all time high of $135. Its lowest point was in November 1996, when it fell to $2.50.

My information is that the sale process was led by Mercury chairman Dr. Giora Yaron in the past few months. HP was all along an almost certain candidate to sign a deal, but IBM, and perhaps others such as SAP, also expressed interest, which may explain the high acquisition price.

In December 2005, at the Globes Israel Business Conference, Dr. Yaron declared that Mercury's management backbone at all levels was in no way inferior to that of the world's leading technology companies, from which it could have been inferred that he had no intention of selling his company at end-of-season sale prices just because of the embarrassing options scandal besetting it.

Mercury was founded as an American company with a development center in Israel by Aryeh Finegold in 1989. It held its IPO a few years later. Amnon Landan was one of the first employees Mercury hired, and at the end of the 1990s, Finegold handed the CEO job over to him, and gradually reduced his activity at the company, eventually making Landan chairman as well.

Among the first private investors in Mercury was Yair Shamir, who together with Yaron and Dr. Igal Kohavi has been a director of Mercury for almost the whole of its existence. All three were recently warned by the SEC that it would consider filing civil enforcement proceeding against each of them under federal securities laws, because they were directors during the period in which the previous management, headed by Landan, received backdated options.

The rapid recovery of the Mercury's share price from its November 2005 low of $22, and the fact that it has risen almost 40% so far this year despite the declines on Nasdaq, amounted to more than an indication that serious talks on the sale of the company were taking place.

The buyer, HP, waited for Mercury to announce the amount of the loss it had been caused by the options affair, a reduction in profit before tax for the periods 1992 to 2004 totaling $567 million. That announcement came at the beginning of this month, and the talks were then renewed, culminating in Tuesday's signing.

Published originally by Globes [online], Israel business news -
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.