Infor Acquisition of SSA Global Sparks a Lawsuit

Published: June 5, 2006

by Timothy Prickett Morgan

Just as everyone was preparing for the Memorial Day long weekend, lawyers for Steven Fisch, an investor in SSA Global, were putting the finishing touches on a class action lawsuit against SSA that seeks to halt the $1.36 billion acquisition of SSA by privately held Infor . The Infor acquisition was announced May 15, and has capped several years of massive consolidation in the application software industry.

Fisch's lawsuit was filed in the Circuit Court of Cook County, Illinois, specifically in its Chancery Division, and among other things, it alleges that the managers and venture capital owners of SSA engaged in self-dealing and breached their fiduciary duty by agreeing to the terms of the Infor takeover. Even though SSA is technically a Delaware corporation, it is for all practical purposes based in Chicago, which is the heart of Cook County (just in case you didn't see the Blues Brothers). The suit specifically names venture capitalists Cerebus Capital Management, which owns 61.8 percent of SSA, and General Atlantic, which owns a 22.6 percent stake, in the suit, as well as Michael Greenough, president, chairman, and chief executive officer of SSA, and the members of the board of directors.

When SSA went public just before Memorial Day in 2005, the venture capitalists that own SSA raised $99 million by selling a 17 percent stake in the firm. The company had set an earlier target for the offering that was about twice that level, and was somewhat disappointed that Wall Street didn't have more of an appetite for SSA's shares. Still, SSA's stock has done reasonably well since it was floated, rising from $11 a share to hit a peak of over $20 a share in late 2005. The stock declined to around $15 a share prior to the announcement of the Infor acquisition, and based on that low point, Infor is shelling out about a 27 percent premium to acquire SSA. This, by the numbers, seems perfectly reasonable. That is a big premium, even by the excessive standards of the application software market, and moreover, $1.36 billion is a lot to pay for a company that brought in $711.8 million in its last fiscal year, ended in July 2005, even if it was able to bring $32.5 million to the bottom line.

This is apparently not enough for Fisch and the other members of the class that he is trying to create as he launches the lawsuit. Fisch's lawsuit says Infor was improperly allowed to purchase SSA after its third fiscal quarter ended April 30, but before SSA released its earnings results to the public. These numbers have not yet been released, by the way, and Fisch contends that the striking price for the Infor deal was based on or somehow affected by the sales in the second fiscal quarter of 2006, when SSA posted $187.9 million in sales and a net income of $6.6 million. "The dominating shareholders agreed to sell the company with the stock reflecting these stale results, but gave Infor until the fall of 2006 to actually pay for the shares--the equivalent of nearly three quarterly periods," the lawsuit states. "Thus, in effect, at the expense of the minority shareholders (plaintiff and the class members), the dominating shareholders sold the company on terms which effectively amount to a long-term option call at an artificially depressed price. Defendants' conduct here is truly unprecedented and grossly undermines the interests of the public shareholders"

Presumably, Fisch assumes SSA is going to do better in the third and fourth fiscal quarters, and this will drive up SSA's stock price and thus the amount of money that Fisch and other public shareholders of the company could attain for their shares. While this analysis could be right, it will be hard to argue that $1.36 billion was not a fair price for SSA at the time the deal was announced three weeks ago. Fisch's suit alleges, in essence, that the owners and managers of SSA unjustly enriched themselves to the detriment of public shareholders, and if this case proceeds to trial, we will find out exactly how much the major players made from the Infor acquisition, and then a jury will have to decide if this was fair or not.

The lawsuit was filed May 26 in the Chancery Court. The class of shareholders will almost certainly be allowed, but it is entirely unclear what a judge might think of all of this. The Fisch suit demands that the defendants in the case withdraw their consent to the sale of SSA and immediately release the fiscal Q3 financial results and projects for the remainder of the fiscal year, ensure that there are no conflicts of interests among the board members and dominant shareholders, and require that any SSA sale be approved by a majority of the public holders of the stock. (This last bit is a cheeky move.) SSA was served on May 30, and made a filing to the Securities and Exchange Commission May 31 notifying shareholders of the lawsuit. "Although the ultimate outcome of this matter cannot be determined with certainty, the Registrant [SSA] believes that the complaint is without merit and it and the other defendants intend to vigorously defend the lawsuit."

Just in case you can't keep it straight either, Infor is owned by Magellan Holdings, which is a wholly owned subsidiary of Infor Global Solutions AG, which is a portfolio company of venture capitalists Golden Gate Capital and Summit Partners.

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