Openwave Shuts Out Hedge Fund

The company's share tumbled Tuesday after it recommenced that investors reject a tender offer by Harbinger Capital for 49% of its stock

Openwave Systems (OPWV), dogged by sliding sales and a steady stream of red ink, has nonetheless attracted a suitor. But the communications software and services provider stiff-armed hedge fund Harbinger Capital June 5, recommending that its shareholders reject Harbinger's partial tender offer for 49% of the company's common stock. The company also declared a one-time special cash dividend of $100 million.

The news did not go over well on Wall Street, as Openwave shares slid in Nasdaq trading June 5.

Openwave said its directors rejected the unsolicited partial tender offer from two funds controlled by Harbinger to buy 40,389,560 of its shares, or approximately 49% of the total, for $8.30 per share in cash. Harbinger said May 22 that it owns 11,110,000 Openwave shares, or around 13%, and would hold 62% if the offer were completed.

"After careful evaluation, Openwave's Board unanimously determined that Harbinger's unsolicited partial tender offer undervalues Openwave and is not in the best interests of the Company and all of our stockholders," the company said in a June 5 press release.

The company is pressing ahead with its own plans, which it detailed in its June 5 release. The plan calls for annual cost savings of approximately $50 million, primarily through a 20% reduction in its workforce, with restructuring charges of approximately $20 million in the fourth quarter of fiscal year 2007.

The company aims to return to sequential revenue growth in each quarter, cut operating expenses from around $60 million in the third quarter of fiscal 2007 to $45 million per quarter in fiscal 2008, and achieve operating profit of around 10% beginning in mid-fiscal 2009.

The $100 million dividend is the latest move to mollify shareholders. The company said that it had completed a $100 million stock repurchase program in April, and believes that "there may be additional opportunities to return value to stockholders upon the potential divestiture of non-core assets".

If the tender succeeds, Harbinger plans to launch its own turnaround for Openwave, including the acquisition of privately held BridgePort Networks, a provider of mobile VoIP applications to telecommunications service providers, with whom the company has collaborated on a number of products.

"We intend to position Openwave as a leader in the growing converged messaging market through the integration of its existing product portfolio and BridgePort Networks' complementary solution," said Harbinger in a May 22 press release.

Harbinger also intends to install BridgePort CEO Mike Mulica as the president and CEO of Openwave if the deal goes through. Perhaps that part didn't sit well with current Openwave management, especially Robert Vrij, who was appointed president and CEO in March after the resignation of David Peterschmidt, who remained on the company's board.

Openwave and Harbinger have been at it for a while. In late December, Harbinger started a proxy contest to appoint two new members to Openwave's board at its Jan. 22 annual meeting, made a number of recommendations on the company's operations, and called for the initiation of a share buyback. Openwave said on Jan. 22 that Harbinger rejected a proposed settlement under which James Zucco would be appointed to the company's board.

The shares tumbled nearly 17% on June 5 to $8.62 on more than two times their average daily trading volume. The shares have tumbled from their 52-week high of $14.57 reached one year ago, though they're still above a low of $5.91 reached July 20, 2006.

CIBC World was also unimpressed. The firm cut its rating on Openwave shares on June 5 to underperform from sector perform, according to a Standard & Poor's MarketScope report. Analyst Shaul Eyal thinks that with prospects of a buyout having dwindled, the worse-case valuation for Openwave could be $5-$6 a share, but Harbinger's tender offer of $8.30 should provide near-term support. Eyal says the board's new strategy may be sound, but it suggests "a long, risky road" ahead for the shares.

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