Open Text Under SEC Review, Attempts Debt-Based Takeover

Open Text (OTEX), the Canadian software company, let it slip in its 10-K that it's under "review" by the SEC and apparently has been for some time.

Interesting, especially in light of what I wrote on March 3, 2005, when I suggested the company might be under SEC probe. As I wrote at the time: "Regulators are clearly asking questions. I know because two officials of the SEC called Wednesday wanting a copy of a story I wrote in 2002 when I worked for TheStreet.com."At the time, I sent the company an email asking whether it had received inquiries from the SEC regarding "revenue recognition or other issues."

The company's response at the time, via email: "We have had no requests from the SEC about revenue recognition."

"What about other issues?" I responded almost immediately via an e-mail. "Is there any reason to believe the SEC is conducting a probe, informal or formal, of your company?"

The company never responded.

News flash -- this just in: Buried in the company's 10-K, under "unresolved staff comments," Open Text discloses that

as part of a review by the staff of the SEC (the “Staff”) of our Annual Report on Form 10-K for the year ended June 30, 2005 and our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2005, December 31, 2005, and March 31, 2006, we have received and responded to comments from the Staff. As of the date of the filing of this Annual Report under Form 10-K certain of the Staff comments remains unresolved and these pertain primarily to our method of accounting for acquisition related costs.

"Review," of course, could be another name for investigation. (The company has never before disclosed any SEC-related issues; companies are now required to disclosed "unresolved staff comments.") No wonder the company never responded to my email about "other issues." The company, an active acquirer, has has a history of using the bare minimum requirement of SEC filings, not press releases, to disclose bad news.

A month or two ago, for example, it waited until late on a Friday to issue an amended 8-K that said after its previously trumped-up acquisition of IXOS several years earlier revealed "accounting irregularities" related to revenue recognition and cost capitalization. Open Text wound up restating a few years of the acquired company's results.

Fresh from that botched deal, Open Text is now trying to buy (with debt, no less) Hummingbird. Meanwhile, it's trying to get those accounting-acquisition issues resolved. The big question: Which will come first?

Update: When all else fails, talk takeover: That's what at least one bullish Open Text (OTEX) analyst is doing in the wake of the company's disclosure that it has unresolved comment issues with the SEC regarding acquisition accounting. Briefing.com notes that:

Canaccord Adams believes a combined Open Text/Hummingbird would be very attractive target to the likes of HPQ (HPQ) and SAP (SAP). They say they have recently been trying to ascertain whether or not HPQ has approached Open Text. While they do not have definitive evidence, they have many anecdotal data points to support this view.

To which I say: Ain't no way this company, with unresolved acquisition accounting issues and a history of buying companies (like Ixos) with accounting issues, will be bought. (At least not without a thorough forensic scrubbing, the kind Open Text will have to agree to endure.)

Disclosure: The author holds no position in any stocks mentioned.