Mercury's Star Rises
Nov. 2, 2005, was a dark day for Tony Zingale. For the better part of a year, he had been groomed by his good friend Amnon Landan to take over as chief executive of the rising software star Mercury Interactive. Then, without warning, an internal investigation indicated that Landan and two other executives had engaged in 49 instances of stock-option manipulation dating back to 1995. The stock plunged 27% in a day, and Zingale was faced with the daunting task of holding together a company in crisis (see BusinessWeek.com, 11/09/05, "Mercury Falling?").
Fast forward to late afternoon July 25, 2006. Zingale is basking in one of the proudest days of his business career: He's just sold Mercury to Hewlett-Packard (HPQ) for $4.5 billion, a 33% premium over his company's stock price. Some nine months ago a stunned and exhausted Zingale spent a dizzying 20 hours breaking bad news to employees, customers, and the public. This afternoon he's zooming in a car from Hewlett-Packard's headquarters, where he completed conference calls with reporters and Wall Street, to his own company, where he'll tell 1,000 employees why they too should be celebrating. Zingale is always an excitable guy—but today he can barely contain himself. "I'm going to tell them why this is a deal I'm super proud of, and I can't wait," he says. "It's a good day."
The day culminates nine grueling months of keeping executives on board, schmoozing jittery customers, and digging through years of convoluted financial information to find out exactly what his predecessors did. But to Zingale's credit, the company ended its 2005 fiscal year with revenues up 25% and some 79 deals over $1 million. He insists the company didn't discount software just to get more customers.
That's all the more impressive considering the options mess facing Mercury—and now engulfing much of Silicon Valley. Industry experts say that in their haste to dole out options to recruit and keep top talent, executives at many companies tested the limits of existing rules regarding the timing of options grants.
And while the practice appears to have been especially pervasive at Mercury, Zingale says Mercury was actually helped by how widespread the practice turned out to be. Suddenly, it wasn't just Mercury that looked bad. It was the whole industry, he says. And if you strip away the options scandal, Zingale was sitting on a pretty high-quality asset to sell. And just as he wouldn't discount his software to attract customers, he wouldn't discount Mercury either.
Mercury specializes in software that helps information technology executives plan and test the deployment of other corporate applications—for instance, making sure a new procurement system actually streamlines operations rather than slows them to a crawl. It's a business IDC Research expects to top $1.9 billion in the next few years.
Sources close to the company's negotiations say originally Mercury was asking $55 a share and talked to several potentially interested parties including HP, Oracle (ORCL), IBM (IBM), Computer Associates (CA), and Symantec (SYMC). "Even after Amnon was fired, Mercury was one of the hottest girls on the block," says one software executive. "With its massive market share and proven products, every big enterprise software company has looked at them, from IBM to CA to HP to EMC."
But at that price, with Mercury's restatement still pending, everyone passed. So Zingale, together with Mercury's chief financial officer, David Murphy, plowed through the restatement that took months longer than expected. All the while he acted as cheerleader to an at times worried and demoralized staff.
The company finally filed its restatement on July 3, a sign that the company had gotten to the bottom of the accounting issues—even though potential shareholder lawsuits and other liabilities remain. It was then that the company disclosed the fiscal 2005 revenue jump of 25%. Suddenly Mercury's price didn't look so steep, or, as Zingale put it, "the acquisition drumbeat got much louder." Says HP Chief Executive Mark Hurd: "We did not look at this as a distressed property. We looked at it as a strong property." Mercury ultimately went for $52 a share.
Mercury is in some ways an ideal fit for HP. For years, the computer and printer giant has been a bit player in corporate software. Its OpenView management software was great for helping companies manage and maintain their computers and related hardware. But even after a 20-company buying spree in recent years, it was not a big player when it came to helping corporations manage their applications—which, after all, is the point of having an IT department in the first place.
So Hurd thinks the Mercury deal lifts HP into a far more compelling strategic place. "This makes us a software competitor to be reckoned with," says Hurd, who thinks the combined operation will be able to increase revenue by 10% a year while delivering hefty 20% operating margins. That's roughly in line with HP's plans before the deal, but at twice the company's 2005 software revenue.
Asked if the deal makes HP a credible rival to IBM, which sources say was also interested in buying Mercury, Hurd says: "You're waving a steak in front of a dog. We think we had the lead in heterogeneous management software with OpenView. Today, we think we extended that lead."
Hurd would get an argument there. With $16 billion in software revenue, Big Blue still dwarfs HP in this lucrative market. Says Charles King of PundIT Research: "HP needs to bring OpenView into the 21st century. Mercury won't be a magic wand, bit it gives them a piece of what they need."
INTO THE BIG TIME.
It's another step toward adding credibility to HP's claim that it can help companies create a "next-generation data center"—a computing infrastructure that's able to automatically adjust to changing work loads and business conditions. Says Technology Business Research analyst Chris Foster, "The Mercury acquisition immediately vaults HP into the big time of the management software business with IBM and CA."
And there's very little overlap between the companies, say analysts. HP will get another infusion of outside talent, particularly in engineering and sales—something Hurd has worked to accomplish after years of insular hiring from within. "This should strengthen HP's management team," says Jeff Clarke, who was executive vice-president of Global Operations at Hewlett-Packard and then COO of Computer Associates before recently joining Travelport, a subsidiary of Cendant Corp.
There's still some risk, as shareholder lawsuits and other potential legal troubles loom large. But Hurd says he's comfortable with what the company found during its due diligence, which Zingale terms "exhaustive."
As for Zingale, he'll spend the next 90 days working on cultural integration, then decide what else he'd like to do. When he joined Mercury in 2004, he thought being its CEO would be his last, big job before retiring. But it ended sooner than he expected.
He'll certainly have other job options in front of him. After all, this is his second big turnaround: In 1997 he came in as CEO of Clarify and three years later sold it to Nortel (NT) for $2 billion. "Not many people get to do something like this twice," he admits, although he bristles at the label of being a turnaround guy, just brought in to fix companies and sell them to the highest bidder.
Now on the other side of that process, he does have some cautionary words for the 80 or so tech companies—and their investors—that are now faced with cleaning up their own options messes: It wasn't as easy as it looks. "For those 80 companies about to go through what we just went through, you better be strong; you better have deep pockets and a significant product line and a solid customer base," he says. "Otherwise this could be a death wish."