Fred Sorkin knows what it’s like to have a bad day at the office. You miss out on a few sales, run into a bad market and miss the quarterly targets, and you’re going to
take a public whipping from shareholders and analysts. As founder, chairman and former CEO of software company Hummingbird Ltd., Sorkin has faced the music before and knows that with the right balance of muted contrition, calm optimism and firm self-confidence, almost any crisis can be overcome. But some problems aren’t so simple.
What do you do, for example, when you want to surrender and investors are insisting you fight on? It gets even tougher when analysts start calling you a chicken and shareholders suggest you sold them out to advance your own agenda. People start throwing around scary-sounding words like “fiduciary duty,” and suddenly the genteel art of investor relations feels like a contact sport.
A few weeks ago, Sorkin agreed to sell Hummingbird to California-based Symphony Technology Group for US$465 million in cash, or $26.75 per share. On first blush it seemed like a reasonable move. After hitting a high of US$60 in March 2000, the stock has bounced between US$20 and US$25 a share for the past 3V2years. Even recent profit improvements failed to rally the stock, and money managers were getting restless. Symphony’s offer was about 12 per cent higher than the stock had been recently trading, and Sorkin figures Hummingbird will be better off in the hands of a larger conglomerate so it can focus on nurturing the business without obsessing over profit growth every three months.
But for investors who’ve stuck with Hummingbird through a gruelling five-year downturn, the deal came like a slap in the face, and now Sorkin is the one taking a beating. In the days following the deal, analysts scoffed at the measly 12 per cent premium and suggested Hummingbird should be worth at least US$30 a share. Sorkin found
himself in the terrible position of essentially having to argue that the company he built isn’t nearly as valuable as everybody thought.
But how could Sorkin know that? Hummingbird’s management didn’t hire an investment bank to approach potential buyers to set up an auction. That would’ve been too disruptive “for employees, for the company culture, for everything,” Sorkin said. Instead, he signed an exclusive agreement with the partner of his choice and presented it to investors, fait accompli. As you might guess, money managers failed to see the genius in Sorkin’s unconventional approach.
Richard Glass, a portfolio manager at Morgan Stanley Investment Management, which owns almost five per cent of the company’s stock, called it a “farce.” “Maybe management needs to find a new home if they don’t believe this business is worth any more,” he
For Hummingbird’s long-suffering shareholders, its sale came as a slap in the face.
said. David Shore, an analyst with Desjardins Securities, called the sale process “unbelievable” and advised clients to vote against the deal.
To understand their irritation, try this skill-testing question: when you sell your house, should you:
(a) give it to the guy who knocks on your door and offers a decent price, just because he promises not to cut down your favourite tree? Or (b) hire an agent, put a sign on the lawn and sell to the highest bidder? (If you answered “b,” a few institutional investors would like to nominate you to sit on Hummingbird’s board of directors.)
Sorkin has his defences, mind you. He says independent appraisals decided the bid was fair. He also says the board would be open to an alternate offer if one comes along. But in the game of acquisitions, the company that arrives first, with the co-operation of management, has a huge advantage. Hummingbird agreed to a 2.5 per cent breakup fee, which means that if somebody else does want to buy the company, they’ll have to pay Symphony about US$12 million just to walk away.
Investors are naturally asking just whose interests are being served here. Sorkin has repeatedly said the Symphony deal is prefer-
able because it will minimize disruption to the company. He expressed fear that if a competitor were to buy Hummingbird, it might scrap some of its products. This way, the company will continue on essentially as is, but if he had simply put the company up for sale, the only assurance he’d have is of the best possible price for stockholders. Of course, that’s the only thing that’s supposed to matter.
Shareholders might’ve been more inclined to give Sorkin the benefit of the doubt, except that he’s shown a tin ear for investor relations before. In 2005, for example, the board saw fit to award him a special US$3.8-million bonus for more than 20 years of outstanding service. Heartwarming stuff, until you consider that Hummingbird made a cumulative profit of just US$1.84 million between ’02 and ’05, and the stock had been flopping around like a dying fish for years. Now, through
the Symphony deal, Sorkin stands to collect another US$32.6 million in cash for his stock.
Chances are, Sorkin and Symphony will buy peace with a modestly improved offer and Bay Street will go back to sleep as it always does. Public spats tend to peter out quickly in Canada, where investors have been conditioned to meekly accept things like multiple-voting shares, outrageous executive compensation, benign monopolies and other abuses of shareholder rights. But letting it go is different from forgetting, and a long, long way from forgiving.
Sorkin says that maybe one day, after the market recovers, Hummingbird will issue shares again and re-emerge as a public company. Maybe. But after all this, who in their right mind would want to buy the stock? M
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