Veritas stock takes a beating
BY ADAM LASHINSKY
Mercury News Staff Writer
Message to investors hoping Veritas Software Corp. (Nasdaq, VRTS) will abandon its deal to buy a chunk of Seagate Software Inc. after Veritas's stock plunged 42 percent Tuesday: Don't hold your breath.
Wags on Wall Street are guessing Veritas -- or its target's parent, Seagate Technology Inc. (NYSE, SEG) -- will throw up its hands because Monday's $1.5 billion all-stock transaction became Tuesday's $862 million laughingstock.
Why won't the deal fall apart? First -- now don't snicker -- because the two companies say so.
Things change, of course. And breaking a promise not to lose one's resolve is less embarrassing than destroying shareholder value. But Veritas executives are vowing to stay the course, which they've steered before.
"Strategically this deal is very important to the company," says Peter Levine, who's responsible for Veritas's merger-and-acquisition activity and sales to large customers. "If we only did things based on day-after reactions we'd never do anything."
Indeed, shares of Veritas plummeted when it announced the smaller acquisition of OpenVision Technologies in early 1997. After completing the deal, Veritas' shares tripled.
Also, in a move unusual for a transaction this size, there is no "collar" on the deal, a mechanism that allows the combination to be called off if stock in Veritas -- the currency of the transaction -- falls below a certain level.
There is, however, an "onerous" breakup fee either side would have to pay the other for walking away, says Veritas Chief Financial Officer Kenneth E. Lonchar.
Another investor concern is the deal's accounting. Veritas plans to take a large one-time charge to earnings for "in-process" research and development, a practice the Securities and Exchange Commission has been scrutinizing of late.
But Veritas thought of that too. According to Lonchar, it approached the SEC on a "no-names" basis and received approval from the agency's chief accountant.
"It's hypothetical, and it's verbal, so this is no guarantee," says Lonchar. But it should give investors confidence the company is prepared to deal with Washington.
A final comment. Veritas, Seagate and their advisers (Donaldson, Lufkin & Jenrette and Morgan Stanley Dean Witter, respectively) better be right that a leak didn't account for the spike in Veritas' trading volume Friday, a full day before the two companies disclosed news of the deal.
Nearly 3.8 million shares changed hands, making it the second-most active day in the company's history, according to Marge Duncan, director of investor relations for Veritas. On an average day, investors trade about 500,000 Veritas shares.
"We do not believe that it leaked," says Duncan, who says the company attempted, without satisfactory results, to ascertain the reason for the heavy volume. "I can't give you a concrete answer as to why," she says. "Everyone was so surprised" when the deal was announced Monday.
One explanation: Friday was the day enterprise-software superstar PeopleSoft Inc. (Nasdaq, PSFT) was rocked in heavy trading after downgrades by two influential analysts. It's not uncommon for investors to swap shares in one software company for another in an effort to maintain sector balance in a portfolio, and Veritas' shares were down 4 percent Friday to $48.25, a relatively small drop.
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