Information Age: News, analysis & insight for IT & business leaders

Hostile takeovers in the software industry rarely, if ever, work. Witness Computer Associates' failure to overthrow Computer Sciences Corp in 1998 or publishing software company Quark's half-hearted assault on Adobe in the same year. As a result, such acts are rarely, if ever, attempted. Until now, when the 18-month long IT industry recession has turned many technology companies into penny-share stocks.

In March, the corporate raiders came banging at the door of enterprise application integration software vendor Mercator, one of the leading, rattling the company's management and prompting prospects and customers to pocket their cheque books while the company's future was decided.

The hostile takeover bid, launched by a group of dissident shareholders veteran software industry CEOs and Mercator competitors, began on 17 March with the announcement that the group was seeking support to have the Mercator board and management team dismissed at the company's upcoming annual general meeting.

Then on 31 March, the day before they were due to meet with Mercator management, the group announced it was launching a formal bid for the company through an acquisition vehicle, Strategic Software Holdings (SSH). The group, already the largest shareholder in Mercator with a 5% holding, offered $74 million in cash, a 40% premium on the company's early April market value, but a figure only two-thirds of Mercator's annual revenues for 2002. Mercator counts Deutsche Bank, John Deere, Lloyds TSB, Home Dept and the European Investment Bank among its customers.

The bidding group's leaders were an interesting bunch. It was led by Rodney Bienvenu, the former president of software services at Divine, now in Chapter 11 bankruptcy protection, as well as the ex-CEO of one of Divine's many acquisitions, portal software company SageMaker. He claims that the current board and management team have "steered [Mercator] into a precarious situation [rendering it] increasingly irrelevant in the marketplace. Other notables in the takeover group include Peter Boni, the former CEO of Cayenne Software, and Michael Turillo, a partner at IBM Business Consulting Services (previously PricewaterhouseCoopers).

They pointed out in various statements at their www.savemercator.com web site and in submissions to the US Securities and Exchange Commission, that over the past three years, Mercator's stock price has fallen from $142 to just $1.40. They also claimed that its share of the EAI market has slipped from 10% to 4.7%.

However, Mercator CEO Roy King has refuted that claim. He argued that Mercator's market share actually increased from 9.9% to 10.5% during 2002, a time when the company's revenues fell only modestly, from $128.8 million to $111.9 million. Moreover, said King, the dissidents launched their bid speculatively, without first securing appropriate finance for the proposed acquisition.

IT analysts at industry research group Gartner calls Mercator's two year long attempts at corporate recovery "fitful". However, it says that the company has developed its product offerings to stay competitive by adding features such as web services support and business process management. "Mercator's direction appeared positive," say Gartner analysts. In early April it was advising organisations to continue to consider Mercator for tactical use, but to shy away from any strategic commitment to the product line as a long-term enterprise integration backbone - at least until its future becomes clearer. And that is just what customers did - to Mercator's dismay. New sales at the company dried to a trickle as the company fought off the month-long hostile bid as scores of current and prospective Mercator customers put their purchases on hold.

That, combined with economic and political uncertainty, triggered a crash in licence sales of 27% to just $7 million. However, healthy maintenance revenues from existing customers, plus access to deferred revenues meant that overall revenues fell less steeply to $23 million compared to $27.4 million in the same quarter a year earlier. Net losses narrowed 30% to $4.3 million.

Then as quickly as it had started, it was all over, although circumstances surrounding the ending of the hostilities have not been made public. In a settlement reached on 21 April, SSH agreed to withdraw its takeover bid and its efforts to overthrow the management. As part of that agreement, Bienvenu becomes an advisor to the Mercator board, paid $1,500 each time he is asked to "present advice and recommendations to the board".

Mercator also agreed to pay SSH the $300,000 costs it incurred in its bid. The dissident group also agreed to hold back from launching any further bid for nine months. In that time, the Mercator management needs to show its comeback strategy is working well. With $25.4 million in the bank and a burn rate of $3.4 million a quarter, it may not have a lot of choice.