KUHN CAPITAL Thursday, October 19, 2017
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Sic Transit Siebel

June 8

In late May, we read with dismay of Siebelís latest burnishing of its already formidable array of takeover defenses.

In this case, management has raised the severance pay and health coverage that go to employees, particularly senior management, should the company be acquired. Management explains the maneuver as an effort to retain employees in the face of rising takeover rumors. Siebel stock fell one percent on the news.

The $1.3 billion CRM vendor already had various deal impediments in place that make the process of acquiring more than 15% of the companyís stock formidable. According to research firm SharkRepellent.net, Siebelís takeover "Bullet Proof" rating was 9.25 on a scale of 10, with 10 being impenetrable. The S&P 500ís average is 5.22.

Yet while busying itself building moats, Siebel management still hasnít figured out what to do with one of the most powerful catnips to hostile takeover groups: cash. In this case, a hoard of $2.2 billion.

As the saying goes, if management canít improve over money fund rates for this idle shareholder asset, somebody else will. Overall, Siebelís current return on equity is about 3.4%.

Now on June 8, Siebel management took a baby step to quell rising shareholder unrest by initiating a quarterly dividend payout of about $13.5 million. Of course, at that rate it would take 40 years of dividending to work through $2.2 billion.

The leading saber-rattler of Siebel takeover threats has been Oracleís Larry Ellison who has publicly marked his old protťgť, Tom Siebel, for competitor extinction. And analysts opine about the attractive operating synergies of a combination.

Red of fang and claw, Larryís demeanor can inspire visions of the apocalypse among even the most placid of target management. In other words, they see themselves getting fired. While he wins a lot, Larryís style also makes the deals he does more likely to be hostile soap operas (e.g., PeopleSoft), and therefore more expensive than necessary for both his and his targetís shareholders. The only groups that make out in these cases are lawyers and target management, cosseted as they are within the self-enriching walls of their anti-takeover fortress.

But even fearsome Larry is an insufficient excuse to disenfranchise stockholders. In the Darwinian world of free markets, the managers of underperforming businesses donít -- in our opinion -- have the moral right to make their shareholders pay for job security and windfalls on exit.

Given Siebel management's conduct to date, cynics would now look for the company to make a large and perhaps ill-considered acquisition in order to dump cash fast and reduce the company's takeover attractiveness. In this upside-down scenario, we've actually seen buyers tell sellers they're not asking for enough. Investment bankers love it.


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