MSC Software has finally filed the proxy statement for its proposed acquisition by Symphony Technology Group – and it makes interesting reading. At the very least, it explains why it took so long to get the proxy to the SEC.
First, a proxy statement is a document that lays out the issues to be voted on at an upcoming shareholder meeting. It usually includes the recommendation of the board of directors, announces the date and time of the meeting and gives the cut-off date to determine who can actually vote at the meeting. In this case, anyone who owned shares on August 27 is eligible to vote at the meeting on September 30, which should stop the arbitragers’ churning of MSC’s shares.
The central issue at this meeting? Whether MSC shareholders should sell to Symphony for $7.63 per share. The $360 million needed to fund the deal, which includes $355 million to MSC’s stockholders and $5 million for expenses connected to the merger, is expected to come from entities controlled by Symphony Technology Group and Elliott International, debt financing and the cash held by MSC at the time the deal closes. Symphony will contribute $100 million while Elliott (MSC’s largest shareholder) will transfer over 6 million shares of MSC common stock and contribute nearly $50 million in exchange for equity and debt securities. In addition, Wells Fargo Foothill and CapitalSource Bank have committed to providing a term loan of $50 million and revolving credit facility of $15 million. The debt, according to the proxy, “will be used for the purpose of financing the merger, paying fees and expenses incurred in connection with the merger and providing ongoing working capital for, and for other general corporate purposes of, the surviving corporation and its subsidiaries.”
By my tally, that’s just barely enough to cover the $360 million cost of the deal. MSC had cash of about $148 million at the end of June; add to that the $100 million from Symphony and $50 from Elliott and we’re at just under $300 million. It’s not clear to me how the banks’ cash will be used for working capital, since it will be needed to pay shareholders — but I have a call scheduled with MSC and will update this once I understand it all.
The best part of these proxies is always the “how it all came about” section (page 34 in my PDF of the proxy). This whole thing started in 2007, when MSC retained JP Morgan to “explore alternatives”. Nothing much happened for a year; then things seemed to take off when Elliott Associates announced in February 2008 that it had acquired 7.4% of shares and started sending letters to MSC. From Elliott to MSC on February 25 2008:
With less than $250 million in annual revenue, MSC is subscale and at a significant competitive disadvantage. This disadvantage stems from: i) less robust sales resources than its competitors (consider the recent difficulties in finding proper product distribution); ii) a far narrower product line (inability to package CAE along with a logical complement such as CAD or PLM); iii) fewer R&D dollars (larger competitors are funding the development of competitive solutions); iv) far weaker customer service and support, two areas of growing importance; and v) lesser “incumbency” with large corporate customers….“[We] believe MSC would be a far stronger product offering in the hands of a larger player who could offer: i) greater marketing resources,ii) stronger customer relationships, iii) the ability to package or bundle software sales (CAE plus CAD or PLM), iv) a robust service and support organization, and v) greater R&D dollars.” [Ed–True but oww.]
Now we enter the world of “Parties A, B, C, etc.” Between February and October 2008 MSC executives met with a number of strategic and financial buyers to see if a deal could be struck. None of the entities are named, but there appear to have been 2 financial and 8 strategic entities in the mix during 2008. MSC got as far as non-disclosures with one financial and four strategic buyers, resulting in a proposed deal with financial buyer A for $9.50 per share in October 2008.
Meanwhile, Elliott was getting antsy. In one December 2008 letter, Elliott wrote that “unnecessary delay with the hope that equity markets rebound or that some new alternative emerges is not in the best interests of the stockholders.”
In February 2009, Party A decided not to submit a formal proposal but expressed interest in an “at-market” transaction (or far closer to the $5.50 to $6.15 at which the shares were trading). According to the proxy, MSC had interest from other parties whose offers could be at a premium to MSC’s stock price at the time, so MSC “declined to move forward with Party A”.
On February 17 2009, Party K indicated interest with a non-binding preliminary offer of $6.50 to $7.00 per share and requested that MSC proceed to negotiate with it on an exclusive basis. Elliott sent another letter suggesting that the Party K offer was a good one (although Elliott had no relationship with K).
Strategic buyers were contacted again by JP Morgan in March 2009 — no go, although Party D came back with a bit of interest in May that ultimately fizzled.
In April, MSC entered what must have been a tense period of negotiation: Party K was offering $7.15 per share and Symphony entered the fray at $7.00 to $7.50 per share. Another letter from Elliott in May 2009 made it clear that Elliott, at least, wanted a deal done ASAP and that $7.00 per share was fair. [Comments coming. You just know it.]
On June 2, Party K submitted a proposal of $7.15 per share; on June 5, Symphony bid $7.20. On June 8, MSC’s board met to discuss the bids, rejected them and invited both parties to up the ante in order to continue talks. Party K declined and Symphony later came back with a bid of $7.40 to $7.50 per share. But the Elliott letter writer was furious that MSC had turned down both bids and threatening legal action if the MSC didn’t “immediately engage with the highest bidder.”
On June 22, MSC had JP Morgan contact Symphony to say that they were open to a higher bid; the Elliott letter writer turned to email to tell MSC that he thought $7.75 was asking far too much for the company (although it doesn’t say in the proxy that MSC actually asked for this much) and urging MSC to just get a deal done. Finally, on June 22, Symphony offered $7.63 per share.
Nope. Not done yet. On July 2, Symphony said it was unable to stick to the $7.63 per share and now wanted to offer $7.53. MSC’s board said $7.63 or nothing; and on July 3, Symphony blinked and agreed. Deal ON!
Nope. Not done yet. On July 17, Party M contacted MSC saying that it contemplated an offer of $8.75 per share, assuming that its due diligence held up. MSC’s board thought this might lead to something, and agreed to let Party M investigate MSC. Lots of management meetings, discussions regarding financing … But as of August 27, Party M had not notified MSC that it would be able to get financing for its proposed deal, so MSC moved ahead with the Symphony offer.
OK. Done. For now. I suppose Party M could still come back before the close of the shareholder meeting on September 30 with financing in place and require that discussions resume.
There’s lots more in the proxy but all of this brings home to me two things
• MSC’s management deserves significant credit for getting anything at all done to actually run their business given all of this. MSC and JP Morgan engaged with 14 prospective buyers, each of whom must have required some amount of data and management time. The level of distraction must have been massive.
• Someone should have taken that man’s stamps away. Activist shareholders make the world a safer place for investors and try to ensure that company management makes decisions in the best interests of shareholders of all sizes — but it seems to me that he was actually trying to urge management to get a deal done sooner rather than for the best possible terms. [MSC likely included the letters in the proxy to show that it managed to turn its harshest critic into an ally; the inferences are mine.]
And, finally, on the price: Assuming that this gets done for $7.63 per share, MSC’s board clearly worked hard get as high a price as they could. Yes, it’s 44% lower than the 52-week high, but everything is down! JP Morgan’s analysis shows that the $7.63 is fair given how MSC stacks up against 10 publicly-traded companies’ such as ANSYS, Aveva, Dassault Systemes, and PTC.