Sometimes, It's a Numbers Game II by Bill Alpert
Summary: Before its summer-2006 acquisition of Hummingbird, shares of Open Text Corp. (OTEX) languished at $13; now they trade at a healthy $23, up almost 100%. That gives it a P/E multiple of 45x its most successful quarter. Tech Trader Bill Alpert can't figure out why: 1) Post acquisition, Hummingbird sales are down 20%. 2) Combined licence revenues, admittedly unpredictable, are down 22%; the company recently said they 'hope' license revenues will trend up later this year. 3) A former Hummingbird salesman has testified he was fired for refusing to cooperate with a scheme to inflate revenues. 4) Pre-acquisition, Hummingbird took reserves amounting to 23% of its gross receivables -- a huge percentage that has no precedent in company history; the reserves have since vanished. Inflated pre-merger charges can spring-load the acquiring company's post-merger numbers. The company already carries $33 million in restructuring reserves from eight previous acquisitions, raising suspicions the company may have artificially inflated acquisition charges in order to absorb post-acquisition operating expenses.